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The bank lending channel of monetary policy transmission in South Africa

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  • Ekaterina Pirozhkova
  • Nicola Viegi

Abstract

This paper studies the bank lending channel of monetary policy transmission in South Africa where the bank loan-level data, which are typically used for this type of analysis, are unavailable. Supply-side changes in credit provision are measured with data on the composition of home-loan supply by banks versus nonbanks. High-frequency surprises in forward rate agreements are used to instrument for exogenous shifts in monetary policy in a proxy-structural vector autoregression model. The bank lending channel is found to be operative, as banks reduce the supply of home loans following monetary tightening, with a negative effect on the housing market. The effectiveness of the deposits channel is shown: banks widen the deposit spread after monetary tightening, and the volume of deposits shrinks. As retail deposits provide a unique, stable source of funding for banks, the deposits channel underlies the operativeness of the bank lending channel in South Africa, consistent with theory.

Suggested Citation

  • Ekaterina Pirozhkova & Nicola Viegi, 2024. "The bank lending channel of monetary policy transmission in South Africa," Working Papers 11072, South African Reserve Bank.
    • Handle: RePEc:rbz:wpaper:11072
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