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The bank lending channel of monetary policy transmission: evidence from a model of bank behavior that incorporates long-term customer relationships

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Abstract

I test for the existence of a bank lending channel of monetary policy transmission. I identify bank lending channel effects with a simple model of bank behavior incorporating long-term customer relationships. The model suggests that when a large fraction of bank assets is held in loans, contractionary monetary policy shocks are more likely to cause a cutback in bank lending, in turn reducing real economic activity. This implication of the model is supported in the data. I conduct a \"horse race\" between the bank lending channel and two alternative non-user-cost-of-capital channels of monetary transmission. The bank lending channel is the strongest of the three. The ability of the fraction of bank assets held in loans to predict how the strength of monetary policy transmission varies over time should be of interest to both theorists and forecasters of business cycles.

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  • Michael S. Gibson, 1997. "The bank lending channel of monetary policy transmission: evidence from a model of bank behavior that incorporates long-term customer relationships," International Finance Discussion Papers 584, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:584
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    2. María Cantero‐Saiz & Sergio Sanfilippo‐Azofra & Begoña Torre‐Olmo, 2022. "Sovereign Risk and the Bank Lending Channel: Differences across Countries and the Effects of the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 285-312, February.
    3. Sáiz, María Cantero & Azofra, Sergio Sanfilippo & Olmo, Begoña Torre & Gutiérrez, Carlos López, 2018. "A new approach to the analysis of monetary policy transmission through bank capital," Finance Research Letters, Elsevier, vol. 24(C), pages 95-104.
    4. Mohd Zaini Abd Karim & Amy Azhar Mohd Harif & Azira Adziz, 2006. "Monetary Policy and Sectoral Bank Lending in Malaysia," Global Economic Review, Taylor & Francis Journals, vol. 35(3), pages 303-326.

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    Bank loans; Monetary policy;

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