The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions
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The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions Juan S. Holguín1 · Jorge M. Uribe2,3 Received: 9 September 2016 / Accepted: 5 July 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract We test whether the credit channel of the monetary policy was present in the United States’ economy from January 2001 to April 2016. To this end, we use a factor-augmented vector autoregression, and we impose sensible theoretical sign restrictions in our structural identification scheme. We use the expected substitution effect between bank commercial loans and commercial papers to identify the credit supply channel. We found that the credit channel appears to have operated in the US economy during the sample period. However, when we split the sample, we found that the credit channel did not operate after the subprime crisis (close to the Zero Lower Bound of the interest rate). This result is robust to changing the sign restriction horizons. It supports current views in the literature regarding the ineffectiveness of the credit channel as a means to foster real economic activity during crises episodes. Keywords Credit channel · FAVAR · Sign restrictions · Monetary policy JEL Classification E51 · E52 · C32
1 Introduction Monetary policy, as the main tool available for policy makers within the paradigm of business cycles stabilization, is supposed to have a significant effect on economic activity, at least in the short run (Bernanke and Blinder 1992; Woodford 2003; * Jorge M. Uribe [email protected] Juan S. Holguín [email protected] 1
Department of Economics, Universidad del Valle, Cali, Colombia
2
Department of Economics and Business Studies, Open Spain
3
Riskcenter, University of Barcelona, Barcelona, Spain
University of Catalonia, Barcelona,
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J. S. Holguín, J. M. Uribe
Galí 2015). Such effects may appear by different means, which include traditional expected impacts of monetary policy on real investment and consumption (Hicks 1937; Jorgenson 1963), effects related to nominal and real exchange rate dynamics (Mundell 1963; Obstfeld and Rogoff 1995), impacts on the composition of firm’s and financial institutions’ balance sheets (Bernanke and Blinder 1988; Bernanke and Gertler 1995; Kashyap and Stein 1995), and impacts on the wealth of households through variations in stock market prices (Tobin 1969), among others.1 One traditional channel of the monetary policy, identified in the field following the seminal work by Bernanke and Blinder (1988), is the bank-lending channel. Under the assumption that from the firm’s perspective, funding by issuing bonds is not a perfect substitute for funding through bank loans, these authors argue that monetary policy would operate not only by impacting interest rates in the bond market but also by influencing the credit supply decisions made by financial institutions. This would modify the balance sheet of the lenders and, in turn, would affect the optimal consumption a
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