Bank Lending Channel of Monetary Policy: Empirical Evidence from Bank Level Data of Selected Emerging Economies
DOI:
https://doi.org/10.55737/qjss.759004305Keywords:
Bank Lending, Monetary Policy, Emerging Economies, Size, Liquidity, CapitalizationAbstract
Examining the effects of monetary policy on the bank lending channel is the main objective of this study on a sample of 18 emerging economies from 2006 to 2021 by using bank-level data. Research shows that the bank lending channel does operate and is functional in the banking sectors of the developing countries that were selected for the sample. The econometric models used in the study include sys-GMM, fixed effects, and instrumental variable regression. In particular, results suggest that monetary policy (or monetary tightening) negatively affects whereas economic growth positively influences bank lending. The specific characteristics of bank variables (i.e., liquidity and size) also expand bank lending. One of the most important factors in reducing the negative impact of monetary policy is the size and liquidity of banks. It has been reported through the robustness check exercise that the results largely remain robust when instrumental variable regression is used and when pandemic years are eliminated from the data sample. This research includes significant implications for policy for the selected emerging economies.
Downloads
References
References
Abdul Karim, Z., Azman-Saini, W. N., & Abdul Karim, B. (2011). Bank lending channel of monetary policy: Dynamic panel data study of Malaysia. Journal of Asia-Pacific Business, 12(3), 225-243. https://doi.org/10.1080/10599231.2011.570618
Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60-80. https://doi.org/10.1016/j.asieco.2016.10.003
Albrizio, S., Choi, S., Furceri, D., & Yoon, C. (2020). International bank lending channel of monetary policy. Journal of International Money and Finance, 102, 102124. https://doi.org/10.1016/j.jimonfin.2019.102124
Alfaro, R., Franken, H., García, C., & Jara, A. (2004). The bank lending channel in Chile. Banking Market Structure and Monetary Policy, 7, 121-146.
Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Bank risk and monetary policy. Journal of Financial Stability, 6(3), 121-129. https://doi.org/10.1016/j.jfs.2009.07.001
Angeloni, I., Kashyap, A. K., & Mojon, B. (Eds.). (2003). Monetary policy transmission in the euro area: a study by the Eurosystem monetary transmission network. Cambridge University Press.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277. https://doi.org/10.2307/2297968
Bekiros, S., Dahlström, A., Uddin, G. S., Ege, O., & Jayasekera, R. (2019). A tale of two shocks: The dynamics of international real estate markets. International Journal of Finance & Economics, 25(1), 3-27. https://doi.org/10.1002/ijfe.1725
Bernanke, B. S., & Blinder, A. S. (1988). Credit, Money, and Aggregate Demand. The American Economic Review, 78(2), 435-439. https://doi.org/10.3386/w2534
Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27-48. https://doi.org/10.1257/jep.9.4.27
Borio, C., & Gambacorta, L. (2017). Monetary policy and bank lending in a low-interest rate environment: Diminishing effectiveness? Journal of Macroeconomics, 54, 217-231. https://doi.org/10.1016/j.jmacro.2017.02.005
Bräuning, F., & Ivashina, V. (2020). U.S. monetary policy and emerging market credit cycles. Journal of Monetary Economics, 112, 57-76. https://doi.org/10.1016/j.jmoneco.2019.02.005
Bustaman, Y. (2019). Monetary Shock, Banking Risk, and Bank Lending Channel: Evidence from Indonesian Banking Industry. Int. Journal of Economics and Management, 13(2), 381-392. https://ssrn.com/abstract=3718626
Chandio, A. S., Tunio, F. H., & Korai, A. G. (2024). Federalism in South Asia: A constitutional analysis of India and Pakistan. Cogent Arts & Humanities, 11(1). https://doi.org/10.1080/23311983.2023.2299536
Chen, M., Wu, J., Jeon, B. N., & Wang, R. (2017). Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31, 116-140. https://doi.org/10.1016/j.ememar.2017.04.001
Chowdhury, R. A., Jahan, D., Mishra, T., & Parhi, M. (2022). Monetary policy shock and impact asymmetry in bank lending channel: Evidence from the UK housing sector. International Journal of Finance & Economics, 29(1), 511-530. https://doi.org/10.1002/ijfe.2696
Correa, R., Paligorova, T., Sapriza, H., & Zlate, A. (2021). Cross-border bank flows and monetary policy. The Review of Financial Studies, 35(1), 438-481. https://doi.org/10.1093/rfs/hhab019
Duan, K., Mishra, T., Parhi, M., & Wolfe, S. (2018). How effective are policy interventions in a spatially embedded international real estate market? The Journal of Real Estate Finance and Economics, 58(4), 596-637. https://doi.org/10.1007/s11146-018-9654-3
Ehrmann, M., Gambacorta, L., Martinez‐Pagés, J., Sevestre, P., & Worms, A. (2001). The effects of monetary policy in the euro area. Oxford Review of Economic Policy, 19(1), 58-72. http://www.jstor.org/stable/23606943
Ferri, G., Kalmi, P., & Kerola, E. (2014). Does bank ownership affect lending behavior? Evidence from the euro area. Journal of Banking & Finance, 48, 194-209. https://doi.org/10.1016/j.jbankfin.2014.05.007
Furceri, D., & Choi, S. (2018). Uncertainty and Cross-Border Banking Flows (No. 2018/004). International Monetary Fund.
Gambacorta, L. (2005). Inside the bank lending channel. European Economic Review, 49(7), 1737-1759. https://doi.org/10.1016/j.euroecorev.2004.05.004
Halvorsen, J. I., & Jacobsen, D. H. (2016). The bank-lending channel empirically revisited. Journal of Financial Stability, 27, 95-105. https://doi.org/10.1016/j.jfs.2016.10.004
Hussain, M., & Bashir, U. (2019). Impact of monetary policy on bank lending: Does market structure matter? International Economic Journal, 33(4), 620-648. https://doi.org/10.1080/10168737.2019.1668820
Huybens, E., & Smith, B. D. (1999). Inflation, financial markets and long-run real activity. Journal of Monetary Economics, 43(2), 283-315. https://doi.org/10.1016/s0304-3932(98)00060-9
Jiménez, G., Ongena, S., Peydró, J., & Saurina, J. (2012). Credit supply and monetary policy: Identifying the bank balance-sheet channel with loan applications. American Economic Review, 102(5), 2301-2326. https://doi.org/10.1257/aer.102.5.2301
Kashyap, A. K., & Stein, J. C. (1995). The role of banks in monetary policy: A survey with implications for the European monetary union. Economic Perspectives-Federal Reserve Bank of Chicago, 21, 2-18.
Kashyap, A. K., & Stein, J. C. (2000). What do a million observations on banks say about the transmission of monetary policy? American Economic Review, 90(3), 407-428. https://doi.org/10.1257/aer.90.3.407
Kasman, S., Vardar, G., & Tunç, G. (2011). The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey. Economic Modelling, 28(3), 1328-1334. https://doi.org/10.1016/j.econmod.2011.01.015
Khan, H. H., Ahmad, R. B., & Gee, C. S. (2016). Bank competition and monetary policy transmission through the bank lending channel: Evidence from ASEAN. International Review of Economics & Finance, 44, 19-39. https://doi.org/10.1016/j.iref.2016.03.003
Kishan, R. P., & Opiela, T. P. (2000). Bank size, bank capital, and the bank lending channel. Journal of Money, Credit and Banking, 32(1), 121. https://doi.org/10.2307/2601095
Kishan, R. P., & Opiela, T. P. (2006). Bank capital and loan asymmetry in the transmission of monetary policy. Journal of Banking & Finance, 30(1), 259-285. https://doi.org/10.1016/j.jbankfin.2005.05.002
Lerskullawat, A. (2017). Effects of banking sector and capital market development on the bank lending channel of monetary policy: An ASEAN country case study. Kasetsart Journal of Social Sciences, 38(1), 9-17. https://doi.org/10.1016/j.kjss.2016.10.001
Matousek, R., & Sarantis, N. (2009). The bank lending channel and monetary transmission in central and Eastern European countries. Journal of Comparative Economics, 37(2), 321-334. https://doi.org/10.1016/j.jce.2008.09.008
Merrino, S. (2021). State-dependent fiscal multipliers and financial dynamics: An impulse response analysis by local projections for South Africa. WIDER Working Paper. https://doi.org/10.35188/unu-wider/2021/015-3
Morais, B., Peydró, J. L., Roldán‐Peña, J., & Ruiz‐Ortega, C. (2019). The international bank lending channel of monetary policy rates and QE: Credit supply, reach‐for‐Yield, and real effects. The Journal of Finance, 74(1), 55-90. https://doi.org/10.1111/jofi.12735
Mushtaq, S., & Siddiqui, D. A. (2017). Effect of interest rate on bank deposits: Evidences from Islamic and non-Islamic economies. Future Business Journal, 3(1), 1-8. https://doi.org/10.1016/j.fbj.2017.01.002
Ogawa, K., & Kitasaka, S. I. (2000). Bank Lending in Japan: its Determinants and Macroeconomic Implications (No. 0505). Institute of Social and Economic Research, Osaka University.
Olivero, M. P., Li, Y., & Jeon, B. N. (2011). Competition in banking and the lending channel: Evidence from bank-level data in Asia and Latin America. Journal of Banking & Finance, 35(3), 560-571. https://doi.org/10.1016/j.jbankfin.2010.08.004
Papadamou, S., & Siriopoulos, C. (2014). Interest rate risk and the creation of the monetary policy committee: Evidence from banks’ and life insurance companies’ stocks in the UK. Journal of Economics and Business, 71, 45-67. https://doi.org/10.1016/j.jeconbus.2013.09.001
Peña, G. (2015). Does monetary policy affect lending? Evidence from some panel data (No. 103882). University Library of Munich, Germany.
Petkovski, M., & Kjosevski, J. (2014). Does banking sector development promote economic growth? An empirical analysis for selected countries in central and south Eastern Europe. Economic Research-Ekonomska Istraživanja, 27(1), 55-66. https://doi.org/10.1080/1331677x.2014.947107
Ramos-Tallada, J. (2015). Bank risks, monetary shocks and the credit channel in Brazil: Identification and evidence from panel data. Journal of International Money and Finance, 55, 135-161. https://doi.org/10.1016/j.jimonfin.2015.02.014
Sáiz, M. C., Azofra, S. S., Olmo, B. T., & Gutiérrez, C. L. (2018). A new approach to the analysis of monetary policy transmission through bank capital. Finance Research Letters, 24, 95-104. https://doi.org/10.1016/j.frl.2017.07.021
Sapriza, H., & Temesvary, J. (2020). Asymmetries in the bank lending channel of monetary policy in the United States. Economics Letters, 189, 109050. https://doi.org/10.1016/j.econlet.2020.109050
Shim, I., & Shin, K. (2021). Financial stress in lender countries and capital outflows from emerging market economies. Journal of International Money and Finance, 113, 102356. https://doi.org/10.1016/j.jimonfin.2021.102356
Shokr, M. A., & Al-Gasaymeh, A. (2018). Bank lending channel and banking sector efficiency: Panel data of Egypt. International Journal of Emerging Markets, 13(5), 1291-1310. https://doi.org/10.1108/ijoem-08-2017-0289
Simpasa, A., Nandwa, B., & Nabassaga, T. (2015). Bank lending channel in Zambia: Empirical evidence from bank level data. Journal of Economic Studies, 42(6), 1159-1174. https://doi.org/10.1108/jes-10-2014-0172
Tuna, G., & Almahadin, H. A. (2021). Does interest rate and its volatility affect banking sector development? Empirical evidence from emerging market economies. Research in International Business and Finance, 58, 101436. https://doi.org/10.1016/j.ribaf.2021.101436
Wu, J., Luca, A. C., & Jeon, B. N. (2011). Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data. Journal of International Money and Finance, 30(6), 1128-1156. https://doi.org/10.1016/j.jimonfin.2011.05.011
Yang, J., & Shao, H. (2016). Impact of bank competition on the bank lending channel of monetary transmission: Evidence from China. International Review of Economics & Finance, 43, 468-481. https://doi.org/10.1016/j.iref.2015.12.008
Ziaei, S. M. (2012). Transmission mechanisms of monetary policy in Saudi Arabia: evidence from SVAR analysis. Journal of Modern Accounting and Auditing, 8(7), 990-1012. http://www.cqvip.com/QK/88581X/201207/43392808.html
Zulkhibri, M. (2013). Bank-characteristics, lending channel and monetary policy in emerging markets: Bank-level evidence from Malaysia. Applied Financial Economics, 23(5), 347-362. https://doi.org/10.1080/09603107.2012.725927
Downloads
Published
Issue
Section
License
Copyright (c) 2024 Syed Muhammad Shuja, Muhammad Naveed Jan, Muhammad Asim Afridi
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
