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.
Full paper (614 KB PDF)
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Last update: July 19, 2001