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The Effect of Monetary Policy on Bank Lending and Aggregate Output: Asymmetries from Nonlinearities in the Lending Channel

  • Jui-Chuan (Della) Chang

    ()

    (Department of Economics National Chi-Nan University)

  • Dennis W. Jansen

    ()

    (Department of Economics Texas A&M University)

This paper examines the asymmetric effects of monetary policy on output and the role of bank-lending behavior. We investigate whether contractionary and expansionary policies have asymmetric impacts on bank loans, and whether there are further differences in the response of small banks and big banks to policy actions. We also investigate the link between changes in bank lending and aggregate economic activity. Our goal is to simultaneously capture the existence of the lending view of the monetary transmission mechanism, the strong relationship between loan growth and output growth, and the asymmetric effect of monetary policy on output. We use a nonlinear vector autoregressive approach to carry out our analysis. Our results show that asymmetry in the response of bank lending to monetary policy is not a substantially contributing factor in explaining the different responses of output to contractionary and expansionary policy.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 6 (2005)
Issue (Month): 1 (May)
Pages: 129-153

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Handle: RePEc:cuf:journl:y:2005:v:6:i:1:p:129-153
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