1. Introduction
The mechanism by which monetary policy is transmitted to the real economy remains a
central topic of debate in macroeconomics. Considerable research has recently examined
the role played by banks in the transmission of monetary policy aiming at uncovering a
credit channel and assessing the relative importance of the money and credit channels.
As the credit or lending channel operates through shifts in loan-supply schedules,
uncovering the credit channel implies distinguishing shifts in loan-supply from shifts in
loan demand schedules brought about by monetary policy shocks.
Distinguishing the relative importance of the money and credit channels is useful for
various reasons. First, understanding which financial aggregates are impacted by monetary
policy would improve our understanding of the link between the financial and the real
sectors of the economy. Second, a better understanding of the transmission mechanism
would help monetary authorities and analysts to interpret movements in financial
aggregates. Finally, more information about the transmission mechanism might lead to a
better choice of intermediate targets. In particular, if the credit channel is an important part
of the transmission mechanism, then the banks’ asset items should be the focus of more
attention.
The importance of the credit channel depends on the extent to which banks rely on
deposit financing and adjust their loan supply schedules following changes in bank
reserves (for a given bank-dependency of the borrowers). The aim of this paper is just to
show that bank loan supply depends on bank deposits and thus, monetary policy by
affecting bank deposits is also able to shift loan bank supply schedules.
At the empirical level, the bulk of the most relevant literature has tried to uncover the
lending channel through the estimation of a reduced form equation for the bank credit
market, with variables in first differences (i.e., stationarised variables). This paper adds to
this area of research, but departs from previous studies on several aspects. In particular it
is argued that the reduced form approach requires strong identifying restrictions and that it
does not allow estimating the relevant parameters. As an alternative we suggest a
“structural approach” which amounts to directly estimate bank loan-supply schedules,
with variables in levels. For that purpose we resort to very recent panel data cointegration
techniques.
The main conclusion of the paper is that there is a banking lending channel in the
transmission of monetary policy in the Portuguese economy and that the importance of
this channel is larger for the less capitalised banks. Size and liquidity do not appear to be
relevant bank characteristics in determining the importance of the lending channel.