Business Loans and the Transmission of Monetary Policy

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to loans' contractual characteristics and borrower-lender types. We show that the... [ view full abstract ]

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to loans' contractual characteristics and borrower-lender types. We show that the puzzling increase of business loans in response to monetary tightening is largely driven by drawdowns from existing commitments at large banks. However, contrary to predictions of the bank lending channel, spot loans also take considerable time to adjust. We argue that banks can reduce loan supply operating on margins other than volumes and document that banks indeed curtail credit by shortening maturities of new loans in response to tightening.