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Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regression with liquid assets of banks as the threshold variable. Using annual data for Indian banks covering the period 2005-2017, we find that there is a negative impact of monetary policy tightening on bank lending. In a low liquidity regime, banks react more strongly to monetary policy as compared to in a high liquidity regime. The reaction of different bank groups (public sector and private sector banks) to monetary policy is heterogenous across the liquidity regimes. Our results suggest that for effective transmission of monetary policy, any abundant liquidity with public sector banks must be neutralized by the monetary authority

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  • Md Gyasuddin Ansari

    (Indian Institute of Management Kozhikode)

  • Rudra Sensarma

    (Indian Institute of Management Kozhikode)

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  • Md Gyasuddin Ansari & Rudra Sensarma, 2021. "Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regressio," Working papers 428, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:428
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    Keywords

    Monetary policy transmission; Panel Threshold Regression; Liquidity; Bank Lending; Lending Channel.;
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