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Banks' financial conditions and the transmission of monetary policy: a FAVAR approach

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  • Jimborean, R.
  • Mésonnier, J-S.

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 sheets structure. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point 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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File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT291.pdf
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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 291.

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Length: 52 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:291

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Related research

Keywords: Monetary transmission; Credit channel; Factor Augmented Vector Autoregression (FAVAR).;

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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. Mésonnier, J-S. & Stevanovic, D., 2012. "Bank leverage shocks and the macroeconomy: a new look in a data-rich environment," Working papers 394, Banque de France.

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