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A new approach to the analysis of monetary policy transmission through bank capital

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  • Sáiz, María Cantero
  • Azofra, Sergio Sanfilippo
  • Olmo, Begoña Torre
  • Gutiérrez, Carlos López

Abstract

The purpose of this article is to quantify how bank capital determines the effects of monetary policy on bank lending. Additionally, we test how these effects differ during monetary contractions and expansions. Using a sample of 3,028 European banks between 1999 and 2012, we find that the reduction in loans caused by monetary restrictions is similar across banks regardless of their capital. In addition, during monetary expansions, banks increase their loan supply more as they become better capitalized. Contrary to previous studies, there are differences in the monetary policy transmission through capital only during expansionary monetary regimes. These results are relevant because previous studies have not measured how the marginal effect of monetary policy on the growth of loans varies with the value of capital. We contribute to the existing literature by using a new approach that quantifies this marginal effect, which considerably improves the interpretation of statistical results from models that include continuous variable interactions and allows a better understanding of the role of bank capital in the transmission of monetary shocks.

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  • Sáiz, María Cantero & Azofra, Sergio Sanfilippo & Olmo, Begoña Torre & Gutiérrez, Carlos López, 2018. "A new approach to the analysis of monetary policy transmission through bank capital," Finance Research Letters, Elsevier, vol. 24(C), pages 95-104.
    • Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:95-104
    DOI: 10.1016/j.frl.2017.07.021
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    More about this item

    Keywords

    Monetary policy; Bank capital; Loan supply; Marginal effect; Continuous variable interaction;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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