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Bank Lending and Monetary Shocks: Evidence from a Developing Economy

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  • Ali Choudhary

    ()

  • Amjad Ali
  • Shah Hussain
  • Vasco J Gabriel

Abstract

This paper investigates the role of credit market frictions in the transmission of monetary shocks in Pakistan. First, using macro data, it is shown that banking spreads are countercyclical, even it is controlled for credit risk, monetary policy and potential maturity mismatches. It is found that this anti cyclical nature is accentuated in the presence of government as an active participant in the private credit market. Then, using a rich dataset on corporate loan agreement for the period 2006-2011, it is found that evidence in times of tight monetary conditions, there is an overall increase in the pass-through of policy impulses to individual loans rates. Furthermore, it is also found that the impact of these shocks is disproportionately felt by borrowers and is especially biased towards less established firms. Moreover, small (weak) banks change their loan conditions the most in tight conditions. Thus, our findings support the view that the existence of a credit channel is particularly relevant for emerging economies, hence emphasizing the need for appropriate stabilization policies. [SBP WP No. 45]. URL:[http://www.sbp.org.pk/publications/wpapers/2012/wp45.pdf].

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:4771.

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Date of creation: Feb 2012
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Handle: RePEc:ess:wpaper:id:4771

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Keywords: financial propagation; balance sheet; banks; finance; borrowers’ net worth; emerging economies; funds; firms; secondary markets; investment banking; Pakistan; credit markets; lending;

References

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  1. Ashcraft, Adam B., 2006. "New Evidence on the Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 751-775, April.
  2. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  3. Abdul Qayyum & Sajawal Khan & Idrees Khawaja, 2005. "Interest Rate Pass-through in Pakistan: Evidence from Transfer Function Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 975-1001.
  4. Atif Mian & Asim Ijaz Khwaja, 2006. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," NBER Working Papers 12612, National Bureau of Economic Research, Inc.
  5. Turgutlu, Evrim, 2010. "Cyclical behavior of price-cost margins in the Turkish banking industry," Economic Modelling, Elsevier, vol. 27(1), pages 368-374, January.
  6. 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.
  7. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  8. Joe Peek & Eric S. Rosengren, 1992. "Crunching the recovery: bank capital and the role of bank credit," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 36, pages 151-186.
  9. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  10. Aliaga-Díaz, Roger & Olivero, María Pía, 2010. "Is there a financial accelerator in US banking?: Evidence from the cyclicality of banks' price-cost margins," Economics Letters, Elsevier, vol. 108(2), pages 167-171, August.
  11. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  12. Angelini, Paolo & Cetorelli, Nicola, 2003. " The Effects of Regulatory Reform on Competition in the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 663-84, October.
  13. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  14. Franklin R. Edwards & Frederic S. Mishkin, 1995. "The decline of traditional banking: implications for financial stability and regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 27-45.
  15. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  16. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  17. 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.
  18. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
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Cited by:
  1. Shabbir, Safia, 2012. "Balance Sheet Channel of Monetary Policy and Economic Growth under Fiscal Dominance: Evidence from Pakistan," MPRA Paper 41496, University Library of Munich, Germany.
  2. Shabbir, Safia & Iqbal, Javed & Hameed, Saima, 2013. "Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan," MPRA Paper 48250, University Library of Munich, Germany.

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