The Lack of Persistence of Interest Rate Changes on Banks’ Lending and Risk Taking Behaviour

Using the shock persistence methodology of Lee, Pesaran and Pierse (1992), we examine whether monetary policy has persistent effects on bank lending behaviour, both directly through the credit channel and indirectly through the risk-taking and liquidity channels. The findings suggest that policy actions aimed at affecting credit risk and bank lending will not have any persistent effects if only the interest rate is employed. Macro-prudential policy should focus on other factors which affect lending decisions, notably the liquidity channel which appears to be an important determinant of the level of lending.