Monetary Policy Shocks and Bank Lending: Evidence from the euro area and United States

The bank lending channel of monetary policy describes how changes in the monetary policy stance affect the cost of banks' balance sheet liabilities, thereby affecting the supply of credit from banks (Bernanke and Gertler... [ view full abstract ]

The bank lending channel of monetary policy describes how changes in the monetary policy stance affect the cost of banks' balance sheet liabilities, thereby affecting the supply of credit from banks (Bernanke and Gertler (1995)). We contribute to this literature by estimating the responsiveness of bank credit flows to the real economy to both conventional and unconventional monetary policy shocks.

We use the Barnichon and Brownlees (2017) semi-parametric smooth extension to the Jorda (2005) local projection methodology. This allows us to generate impulse responses which are robust to misspecification of the model, estimated from a panel structure, and which allow us to test for non-linearity of the process. The local projection approach also allows us to produce impulse responses to joint conventional and unconventional monetary policy shocks. This allows us to better identify the impact of monetary policy since the advent of unconventional monetary policy, which has been used concurrently with conventional monetary policy in most of the post-global financial crisis period.

We estimate the impact of changes in monetary policy on both the volume and price of lending to non-financial corporations in a quarterly panel of euro area countries and the United States, from 2002 to 2017. We identify conventional monetary policy shocks using exogenous, unexpected changes in short-term interest rates while we identify the impact of unconventional monetary policies using unexpected changes in the slope of the term structure of the yield curve. We control for a range of factors which theory suggests should affect the bank lending channel, including unemployment, inflation, sovereign stress, and measures of NFC credit demand and banks' willingness to lend. We find significant evidence that both conventional and unconventional monetary policy shocks have been passed-through to the price of bank credit, while the unanticipated shocks helped to stimulate growth in lending to NFCs.