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Banks' Financial Conditions and the Transmission of Monetary Policy: A FAVAR Approach

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  • Ramona Jimborean

    (Banque de France)

  • Jean-Stéphane Méesonnier

    (Banque de France)

Abstract

We propose a novel approach to assess whether banks’ financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks’ liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks’ balance sheet structures. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point in monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 34 (December)
Pages: 71-117

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Handle: RePEc:ijc:ijcjou:y:2010:q:4:a:4

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  1. Skander J. Van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
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Cited by:
  1. Jean-Stéphane Mésonnier & Dalibor Stevanovic, 2012. "Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment," CIRANO Working Papers 2012s-23, CIRANO.

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