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The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions

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  • Nicholas Apergis

    (University of Piraeus)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

  • Effrosyni Alevizopoulou

    (University of Piraeus)

Abstract

The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2012-10.

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Length: 37 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:uct:uconnp:2012-10

Note: Stephen M. Miller is corresponding author
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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
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Keywords: Monetary policy rules; bank lending channel; European banks; GMM methodology;

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