The Bank Lending Channel: a FAVAR Analysis

Journal of money credit and banking (Impact Factor: 1.09). 01/2009; 45(4). DOI: 10.1111/jmcb.12067
Source: RePEc


We examine the role of commercial banks in monetary transmission in a factor-augmented vector autoregression (FAVAR). A FAVAR exploits a large number of macroeconomic indicators to identify monetary policy shocks, and we add commonly used lending aggregates and lending data at the bank level. While our results suggest that the bank lending channel (BLC) is stronger than previously thought, this feature is not robust. In addition, our results indicate a diffuse response to monetary innovations when individual banks are grouped according to asset sizes and loan components. This suggests that other bank characteristics could improve the identification of the BLC.

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Available from: Chetan Dave, Oct 10, 2014
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    • "7 Bernanke et al. (2005) propose a factor-augmented vector autoregressive model (FAVAR) based on the development of principal components analysis outlined by Stock and Watson (2002). A factor-augmented approach has been used by Dave et al. (2013) to isolate the bank lending channel in monetary transmission of US monetary policy and by Gilchrist et al. (2009) to assess the impact of credit market shocks on the US activity. One of the main advantages of this methodology is that a single individual variable or factor can capture the dynamic of a large amount of information contained in many variables. "
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    • "While close in spirit to ours, these studies do however not deal directly with monetary policy transmission and do not consider disaggregated bank data. By contrast, Dave et al. (2009) investigate the dynamic response of both credit aggregates and bank level loan growth measures to a monetary policy shock using disaggregated US bank data. However, they mainly focus on the differentiated responses of different types of loans, in the spirit of Den Haan et al. (2007), and do not use their FAVAR model to assess as we do whether fluctuations in banks' financial conditions (and their dispersion) significantly alter the transmission of monetary shocks to the broader macroeconomy. "
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