allows one to distribute the average effect (given by α1 ) across banks, (according to their
size, liquidity, etc.), but the existence of a lending channel, at the aggregate level, rests
always and solely on the coefficient θ3 of rt in (4.2). In this sense we may say that by
resorting to panel data does not help solving the identification problem of the reduced
form equation, but only to avoid some potential bias due to, otherwise, neglected
heterogeneity in the banks supply schedule.
Notice also that, in principle, we cannot have θ3 = 0 and θ4 > 0 because in this case
the average lending channel will eventually be zero (α1 = 0 ) and banks with size,
liquidity or capitalisation ratios above average would exhibit a downwards supply shift
and not an upwards supply shift as the lending channel predicts.
Finally we note that the reduced form equation and the interpretation of the
corresponding coefficients in (4.2) depend on the underlying structural model. This
includes not only the specific loan supply and demand equations, but also the demand and
supply functions for money and the type of monetary policy instrument used by the central
bank (discount interest rate, open-market operations or the required reserves coefficient).
In general, we note that the general reduced form (4.2) is consistent with a huge set of
different structural models, provide they have ln yt , πt , rt , ln(R/ P)t and zt as the
exogenous variables, and that the specific reduced form varies according to the monetary
policy instrument used by the central bank.
In the context of the reduced form approach an alternative equation to (4.2) could be
obtained if one assumes that deposits are perceived as exogenous at the bank level. This
equation can be derived from a simple structural model involving only the credit demand
and credit supply equations. This framework seems to be quite a reasonable one, as the
existence of the lending channel rests on the assumption of deposits exogeneity at the
aggregate level i.e., that deposits are determined by the central bank monetary policy10. If
we assume that at the bank level, deposits as well as the bond interest rate are exogenous,
then we may stick to a “structural model” consisting only of equations (3.3) and (4.1). In
this case the reduced form equation reads as
ln( C / P ) t = θo + θι ln yt + θ2∏t + θ3 ln( D / P ) t + θ4 ln( D / P ) + θ5 it
(4.6)
(+) (-) (+) (-) (?)
N
∑θ4zit
i=1
to add up to zero (with some possible exceptions that will be discussed in the empirical section, below).
10 We note that the exogeneity of deposits, at the aggregate level is a pre-condition for the existence of
the credit channel. The assumption of deposits exogeneity will be discussed below in the empirical section.
11