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Bank loan components, uncertainty and monetary transmission mechanism

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  • Ekaterina Pirozhkova

    (Birkbeck, University of London)

Abstract

We study the dynamic characteristics of bank loan components and seek to resolve the puzzle raised by den Haan et al. (2007) that commercial and industrial loans increase following monetary contraction. By estimating a set of structural vector autoregression models on US data for 1954-2015, we demonstrate that when risk and balance sheet factors are controlled for, business loans decrease after monetary tightening, what is consistent with bank-lending channel of monetary policy transmission mechanism. This result is robust to VAR specification and to the measure of uncertainty employed. We distinguish between volatility measures of uncertainty and measures of uncertainty as vagueness/"unknownness" of economic outlook and show that business loans go down following uncertainty shock only after the latter uncertainty measure is used. We demonstrate that controlling for risk factors is critical for explaining the dynamic properties of business loans, as variance of business loans is driven by innovations to uncertainty and credit risk to the greater extent than by innovations to macroeconomic variables.

Suggested Citation

  • Ekaterina Pirozhkova, 2017. "Bank loan components, uncertainty and monetary transmission mechanism," BCAM Working Papers 1702, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:1702
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    Cited by:

    1. Ekaterina Pirozhkova, 2017. "Banks' balance sheet, uncertainty and macroeconomy," EcoMod2017 10430, EcoMod.

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    More about this item

    Keywords

    uncertainty; bank loans; vector autoregression.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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