where now deposits and the bond interest rate appear as regressors instead of the monetary
policy interest rate and where
θ _ α1λ3
(4.7)
(4.8)
θ3 O
λ3 -α3
θ α α 2 λ3
θ4 О
λ3 -α3
Now we can see, that in this case, there is no identification problem as we have
θ3 > 0 if and only if α1 > 0 (and α3 is not very large) 11. Similarly for θ4 . Thus,
estimating equation (4.6) (or a dynamic generalisation of equation (4.6)), with first
differenced variables (to account for data non-stationarities) would probably be a sensible
way to proceed when the time series dimension of the data does not allow resorting to
estimation techniques capable of dealing with the endogeneity of some regressors, which
will necessarily arise if we try to directly estimate some “structural” equation, namely the
credit supply function (4.1). We deal with this issue in the next section.
5. Defining an alternative empirical approach
Given the difficulties with the reduced form approach pointed out in the previous section
we will try to identify the existence of the credit channel by directly estimating the supply
curve (3.4) or (4.1) or some generalisation of these equations. However, as it is well
known, the direct estimation of structural equations raises an estimation as well as an
identification problem.
The identification of demand and supply schedules is discussed for instance in
Intrilligator et al. (1996, p. 528) and in Zha (1997). The basic idea is that the supply curve
is identified provide the demand curve includes at least one explanatory variable that does
not enter the supply equation. We assume that deposits and the bond interest rate are
exogenous at the bank level and so our working model should be perceived as being
composed solely of the credit demand and credit supply curves. Under this assumption,
we can see that, as they stand, the supply curve (3.4) and the demand curve (3.3) are
identified. The supply curve is identified because the demand curve includes lnyt as an
11 We note that in rigour one still needs the loan interest rate homogeneity assumption (α3 and λ3 not
dependent on the bank specific characteristics).
12