Stefanos Papadamou, Vaggelis Arvanitis and Costas Siriopoulos

Correspondence: S. Papadamou, stpapada@uth.gr

Department of Economics, University of Thessaly, Greece

pdf (904.96 Kb) | doi: https://doi.org/10.47260/bae/112

Abstract

This paper, tests the bank lending channel of monetary policy transmission mechanism in a series of European countries since the Euro currency circulation. By disaggregating bank loans to households for consumer, housing and other purposes over the period 2003:Q1 to 2012:Q4, we try to shed light to any hidden dynamics by aggregate data. An unrestricted VAR model and impulse response analysis provide empirical evidence of an active bank lending channel working via housing loans for the majority of countries studied (Germany, France, Belgium, Italy, Spain, Sweden and UK). Additionally, there is evidence of a transmission mechanism proceed through consumer credit in Austria, Belgium and Netherlands. Moreover our results reveal that monetary transmission to housing loans proceeds quickly in Germany, Spain, Sweden and UK compared to the others. However in Belgium, Germany and UK, consumer credits reduction also amplifies the initial shock on GDP and on inflation produced by a tightening monetary policy. Finally, banks’ lending behaviour varies significantly according to the purposes of household loans. In Belgium, Sweden and UK, housing loans reductions coexist with increase of loans for consumption and other reasons, implying that the former is driven by supply forces while the latter by demand forces.

Keywords:

  Monetary policy, bank lending, Transmission mechanism VAR models

References

Altavilla, C., 2000. Measuring monetary policy asymmetries across EMU, Rivista Internazionale di  Scienze Sociali No.1.

Altunbas, Y., Fazylow, O. and Molyneux, P. (2002) Evidence on the bank lending channel in Europe, Journal of Banking and Finance, 26, 2093-2110.

Angeloni, I., Kashyap, A., Mojon, B. and Terlizzese, D. (2002) Monetary transmission in the euro area: where do we stand?,ECB Working Paper Series No. 114.

Aoki, K., Proudman, J. and Vlieghe, G.(2004) House prices, consumption, and monetary policy: a financial accelerator approach, Journal of Financial Intermediation,13, 414-435.

Barran, F., Coudert, V. and Mojon, B. (2003) The transmission of monetary policy in European countries CEPII, Document de travail No. 96.

Bernanke, B.(1986) Alternative explanations of the Money-Income Correlation, Carnegie Rochester Conference Series on Public Policy 25.

Bernanke, B.(1993) Credit in the macroeconomy, FRBNY Quarterly Review Spring, 50-70

Bernanke, B. and Blinder, A.(1988) Credit, money, and aggregate demand, American Economic Review,78, 435-439.

Bernanke, B. and Blinder, A.(1992)The federal funds rate and the channels of monetary transmission, American Economic Review,82, 901-921.

Bernanke, B. and Gertler, M.(1995) Inside the black box: the credit channel of monetary policy transmission, Journal of Economic Perspectives,9, 27-48.

Brissimis, SN. and Magginas, NS.(2006) Forward-looking information in VAR models and the price puzzle, Journal of Monetary Economics,53, 1225-1234.

Buttigliore, L. and Ferri, G. (1994) Monetary policy transmission via lending rates in Italy: any lessons from recent experience?, Banca d’ Italia, Discussion Paper No. 224.

Cecchetti, S.(1999)Legal structure, financial structure, and the monetary transmission mechanism, Federal Reserve Bank of New York Economic Policy Review, 5, 9-28.

Christiano, L., Eichenbaum, M. and Evans, C. (1999)Monetary policy shocks: what have I learned and to what end? In: Woodford, M. and Taylor, J.B. (Eds.), Handbook of Macroeconomics. North-Holland, Amsterdam, 65-148.

Christiano, L., Eichenbaum, M. and Evans, C. (1994)The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds, NBER Working Paper No. 4699.

Dale, S. and Haldane, G.(1995) Interest rates and the channels of monetary transmission: some sectoral estimates, European Economic Review,39, 1611-1626.

De Bondt, G., Mojon, M. and Valla, N.(2003) Term structure and the sluggishness of retail bank rates in the Euro area European Central Bank, mimeo.

De Bondt, GJ.(2004)The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market, International Journal of Finance and Economics,9, 219-228.

Dedola, L. and Lippi, F.(2005) The monetary transmission mechanism: evidence from the industries of five OECD countries, European Economic Review,49, 1543-1569.

Den Haan, W-J., Sumner, S-W. and Yamashiro, G-M.(2007) Banks’ loan portfolio and the monetary transmission mechanism, Journal of Monetary Economics,54, 904-924.

Ehrmann, M.(2000) Comparing monetary policy transmission across European countries,Review of World Economics (WeltwirtschaftlichesArchiv),136, 58-83.

Ehrmann, M., Gambacorta, L., Martinez Pagés, J., Sevestre, P. and Worms, A. (2001) Financial Systems and the Role of Banks in Monetary Policy Transmission in the Euro Area, ECB Working Paper No. 105.

Elbourne, A. (2008) The UK housing market and the monetary policy transmission mechanism: An SVAR approach, Journal of Housing Economics,17, 65-87.

Escriva, J. and Haldane, G. (1994) The interest rate transmission mechanism: Sectoral estimates for Spain Banco de Espana, Discussin Paper No. 9414.

Favero, C.(2001) Applied Macroeconometrics, Oxford University Press, Oxford, UK.

Favero, C., Giavazzi, F., Flabbi, L. and (1999)The Transmission Mechanism of Monetary Policy in Europe: Evidence from Banks' Balance Sheets, NBER Working Paper Series No. 7231.

Fischer, B., Lenza, M., Pill, H. and Reichlin, L. (2009)Monetary analysis and monetary policy in the euro area 1999-2006, Journal of International Money and Finance,28, 1138-1164.

Friedman, B. and Kuttner, K.(1992) Money, Income, Prices and Interest Rates, American Economic Review,82, 472-492.

Gambacorta, L.(2005) Inside the bank lending channel, European Economic Review,49, 1737-1759.

Garretsen, H. and Swank, J.(1998) The transmission of interest rate changes and the role of bank balance sheets: a VAR-analysis for the Netherlands, Journal of Macroeconomics,20, 325-339.

Garretsen, H. and Swank, J.(2003) The bank lending channel in the Netherlands: the impact of monetary policy on households and firms, De Economist,151, 35-51.

Gerlach, F. and Smets, F.(1995)The monetary transmission mechanism: evidence from the G7 countries, CEPR Discussion Paper, 1219.

Gertler, M. and Gilchrist, S.(1993a)The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence, The Scandinavian Journal of Economics, 95, 43-64.

Gertler, M. and Gilchrist, S.(1993b) The cyclical behavior of short-term business lending: implications for financial propagation mechanisms, European Economic Review,37, 623-631.

Giuliodori, M.(2005) The role of house prices in the monetary transmission mechanism across European countries, Scottish Journal of Political Economy,52, 519-543.

Guende, A. andMoersch, M.(1997) On the existence of a credit channel of monetary policy in Germany, Kredit und Kapital, 30, 173-185.

Hernando, I. and Pagés, J-M.(2001) Is there a bank lending channel of monetary policy in Spain?,ECB Working Paper Series No. 99.

Huang, Z.(2003) Evidence of a bank lending channel in the UK, Journal of Banking & Finance,27, 491-510.

Iacoviello, M. (2004) Consumption, house prices, and collateral constraints: a structural econometric analysis, Journal of Housing Economics,13, 304-320.

Iacoviello, M. and Minetti, R.(2008) The credit channel of monetary policy: evidence from the housing market, Journal of Macroeconomics,30, 69-96.

Kakes, J., Sturm, J-E. and Maier, P. (1999) Monetary transmission and bank lending in Germany, CCSO Working Paper No.199906.

Kashyap, A., Rajan, R. and Stein, J. (2002) Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking, The Journal of Finance, 57, 33-73.

Kashyap, A. and Stein, J.(1995) The impact of monetary policy on bank balance sheets,Carnegie Rochester Series on Public Policy.

Kashyap, A. and Stein, J.(1997) The role of banks in monetary policy: A survey with implications for the European monetary union, Economic Perspectives,21, 2-18.

Kashyap, A. and Stein, J.(2000) What do a million observations on banks say about the transmission of monetary policy?, American Economic Review,90, 407-428.

Kieler, M. and Saarenheimo, T.(1998) Differences in monetary policy transmission? A case not closed, European Commission, Economic Papers No. 132.

Kishan, R. and Opiela, T.(2000) Bank size, bank capital and the bank lending channel, Journal of Money, Credit, and Banking,32, 121-141.

Koufmann, S. and Valderrama, M-T.(2008) Bank lending in Germany and the UK: are there differences between a bank-based and a market-based country? International Journal of finance and economics,13, 266-279.

Kuppers, M. (2001) Curtailing the black box: German banking groups in the transmission of monetary policy, European Economic Review,45, 1907-1931.

Leung, C. (2004) Macroeconomics and housing: a review of the literature, Journal of Housing Economics,13, 249-267.

Maclennan, D., Muellbauer, J. and Stephens, M. (1998) Asymmetries in housing and financial institutions and EMU, Oxford Review of Economic Policy,14, 54-80.

McCarthy, J. and Peach, R-W.(2002) Monetary policy transmission to residential investment, FRBNY Economic Policy Review,8, 139-158.

Mishkin, F.(2001) The transmission mechanism and the role of asset prices in monetary policy, NBER Working Paper Series No. 8617.

Mojon, B.(2000)Financial structure and the interest rate channel of ECB monetary policy,ECB Working Paper Series No. 40.

Mojon, B. and Peersman, G.(2001) A VAR description of the effects of monetary policy in countries of the Euro area, ECB Working Paper Series No. 92.

Morsink, J. and Bayoumi, T.(2001) A Peek Inside the Black Box: The Monetary Transmission Mechanism in Japan, IMF Staff Papers, Palgrave Macmillan Journals, 48, 22-57.

Muellbauer, J. and Murphy, A.(1997) Booms and busts in the UK housing market, The Economic Journal,107, 1701-1727.

Papadamou, S. (2013).Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates. Economic Modelling, 33, 545-551.

Papadamou, S. and Siriopoulos, C. (2012) Banks’ lending behavior and monetary policy: evidence from Sweden, Review of Quantitative Finance and Accounting,38, 131-148.

Papadamou, S., Sidiropoulos, M., & Spyromitros, E. (2014a) Central Bank Transparency and the Interest Rate Channel: Evidence from Emerging Economies, Economic Modelling, 10.1016/j.econmod.2014.10.016.

Papadamou, S., Sidiropoulos, M., & Spyromitros, E. (2014b). Central bank credibility aspects and macroeconomic performance: Evidence from Eastern European and Latin American countries, Eastern European Economics, forthcoming May.

Peek, J. and Rosengren, E.(1995) Bank lending and the transmission of monetary policy. In Peek J, Rosengren E (eds.), Is bank lending important for the transmission of monetary policy?,Conference Series 39, 47-68,Federal Reserve Bank of Boston.

Peersman, G.(2004) The Transmission of Monetary Policy in the Euro Area: Are the Effects Different Across Countries?, Oxford Bulletin of Economics and Statistics,66, 285-308.

Peersman, G. and Smets, F.(2003)The monetary transmission mechanism in the euro area: evidence from VAR analysis, in Monetary Policy Transmission in the Euro Area: I. Angeloni, A.K. Kashyap and B. Mojon, Cambridge University Press, pp. 36-55.

Ramaswamy, R. and Sloek, T.(1998)The real effects of monetary policy in the European Union: what are the differences, IMF Staff Papers, 45, 374-396.

Ramey, V.(1993) How important is the credit channel in the transmission of monetary policy?, Carnegie-Rochester Conference Series on Public Policy,39, 1-45.

Sims, C.(1980) Macroeconomics and reality, Econometrica,48, 1-48.

Sims, C., Stock, J. and Watson, M.(1990) Inference in linear time series models with some unit roots, Econometrica,58, 113-144.

Stein, J.(1998)An adverse selection model of bank asset and liability management with implications for the transmission of monetary policy, RAND Journal of Economics,29, 466-486.

Toolsema, L.(2002) Competition in the Dutch consumer credit market, Journal of Banking & Finance,26, 2215-2229.

Tsatsaronis, C.(1995) Is there a Credit Channel in the Transmission of Monetary Policy? Evidence from Four Countries, in BIS, Financial Structure and the Monetary Policy Transmission Mechanism, CB document 394, pp. 154-187.

Warnock, V.C. and Warnock, F.E. (2008) Markets and housing finance, Journal of Housing Economics, 17, 239-251.

Weber, A., Gerke, R. and Worms, A. (2009) Has the monetary transmission process in the euro area changed? Evidence based on VAR estimates,Working Papers No. 276,Bank for International Settlements.

Yao, R. and Zhang, H-H.(2005) Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints, Review of Financial Studies,18, 197-239.