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The Credit Channel in an Emerging Economy

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  • Viviana Fernández

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Abstract

To date, there is no consensus about how frictions in the credit market affect the transmission of the monetary policy to the real economy. The traditional money channel states that when the Central Bank reduces its reserves, commercial banks are forced to reduce their demand for deposits. If prices are sticky, in the short-run a decrease in real monetary holdings should lead to higher real interest rates and should translate into a contraction of interest-sensitive components of aggregate spending. The most recent literature has focused on the role of the credit channel. This states that the direct effect of monetary policy on interest rates is amplified by changing the terms and availability of bank loans. Given that firms and consumers lack perfect substitutes for bank loans, they will be unable to offset the reduced supply of loans. This article focuses on testing the existence of a credit channel in Chile. Our sample comprises 19 banks that operated in Chile over January 1999-December 2002. Over that period, banks primarily offered loans to firms in the manufacturing and the financial services sectors (13 and 26 percent of total loans, respectively), and to individuals through consumption and mortgage loans (9 and 10 percent of total loans, respectively). Our estimation results show that the loans supply and the deposits demand are affected by bank characteristics—such as liquidity, size, past-due loans share, and capitalization—economic activity, the level of interest rates, real exchange depreciation, and by the Santiago Stock Exchange trading. Our results support the existence of a credit channel in the Chilean economy.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 175.

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Date of creation: 2004
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Handle: RePEc:edj:ceauch:175

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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  2. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
  3. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
  4. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  5. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  6. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2000. "A new database on financial development and structure," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125518, Tilburg University.
  7. Ross Levine, 2000. "Bank Concentration: Chile and International Comparisons," Working Papers Central Bank of Chile 62, Central Bank of Chile.
  8. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-53, February.
  9. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  10. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  11. Andreas Worms, 2003. "Interbank Relationships and the Credit Channel in Germany," Empirica, Springer, vol. 30(2), pages 179-198, June.
  12. Hernando, Ignacio & Martinéz Pagés, Jorge, 2001. "Is there a bank lending channel of monetary policy in Spain?," Working Paper Series 0099, European Central Bank.
  13. Ignacio Hernando & Jorge Martínez Pagés, 2001. "Is There a Bank Lending Channel of Monetary Policy in Spain?," Banco de Espa�a Working Papers 0117, Banco de Espa�a.
  14. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
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Cited by:
  1. David Archer, 2006. "Implications of recent changes in banking for the conduct of monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 123-51 Bank for International Settlements.

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