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Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis

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  • Dave, Chetan

    (University of Alberta, Department of Economics)

  • Dressler, Scott J.

    (Villanova University)

  • Zhang, Lei

    (North Dakota State University)

Abstract

Has paying interest on excess reserves (IOER) impacted monetary policy transmission? We employ a factor augmented VAR (i.e. FAVAR) to analyze a traditional bank lending channel (BLC) as well as a potential reserves channel. Our main results are: (i) the bank-lending response to an exogenous monetary policy innovation in the Federal Funds rate (i.e. the BLC) remains active but smaller than pre-2008 measures; (ii) the bank-lending response to any IOER-based liquidity innovations (i.e. the reserves channel) either mimics the BLC or is largely insignificant. These results provide little evidence that IOER has significantly impacted bank lending or monetary transmission.

Suggested Citation

  • Dave, Chetan & Dressler, Scott J. & Zhang, Lei, 2020. "Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis," Working Papers 2020-6, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2020_006
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    References listed on IDEAS

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    1. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    2. Chetan Dave & Scott J. Dressler & Lei Zhang, 2013. "The Bank Lending Channel: A FAVAR Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1705-1720, December.
    3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    4. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
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    7. Huberto M. Ennis & Alexander L. Wolman, 2015. "Large Excess Reserves in the United States: A View from the Cross-Section of Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 251-289, January.
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    More about this item

    Keywords

    Bank Lending Channel; FAVAR; IOER; Monetary Policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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