provided by Research Papers in Economics

THE BANK LENDING CHANNEL OF MONETARY POLICY:
IDENTIFICATION AND ESTIMATION USING PORTUGUESE MICRO

BANK DATA*

Lrnsa Farinha

Carlos Robalo Marques
(January 29, 2002)

Abstract

This paper investigates the existence of the bank-lending channel in the
transmission of monetary policy using Portuguese micro bank data. In contrast
to the conventional approach, which addresses the identification issue by
resorting to reduced form equations for bank credit with variables in
differences, we directly estimate loan-supply schedules with variables in
levels, thereby exploiting recent results on cointegration for panel data.

We conclude that there is evidence of the existence of a bank-lending
channel, and that the importance of the bank lending-channel is larger for less
capitalised banks.

Keywords:  Monetary policy transmission mechanism; bank lending channel;

identification; nonstationary panel data; cointegration;

JEL classification: C33, E44, E52, G21;

^* A previous version of this paper was presented at the conference on “Monetary Policy Transmission in
the Euro-Area” held in Frankfurt, December 18-19, 2001.

We specially thank, without implicating, Maximiano Pinheiro, Ferreira Machado, Anil Kashyap,
Michael Ehrmann, Leo de Haan and Nuno Ribeiro for helpful discussions on some important points of the
paper. The usual disclaimer applies.

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