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Banks' Financial Conditions and the Transmission of Monetary Policy: A FAVAR Approach

Author

Listed:
  • Ramona Jimborean

    (Banque de France)

  • Jean-Stéphane Méesonnier

    (Banque de France)

Abstract

We propose a novel approach to assess whether banks’ financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks’ liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks’ balance sheet structures. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point in monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.

Suggested Citation

  • Ramona Jimborean & Jean-Stéphane Méesonnier, 2010. "Banks' Financial Conditions and the Transmission of Monetary Policy: A FAVAR Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 71-117, December.
  • Handle: RePEc:ijc:ijcjou:y:2010:q:4:a:4
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    References listed on IDEAS

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    1. Skander J. van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
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    Cited by:

    1. Kok, Christoffer & Gross, Marco & Żochowski, Dawid, 2016. "The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model," Working Paper Series 1888, European Central Bank.
    2. Challe, Edouard & Mojon, Benoit & Ragot, Xavier, 2013. "Equilibrium risk shifting and interest rate in an opaque financial system," European Economic Review, Elsevier, vol. 63(C), pages 117-133.
    3. Mésonnier, J-S. & Stevanovic, D., 2012. "Bank leverage shocks and the macroeconomy: a new look in a data-rich environment," Working papers 394, Banque de France.
    4. repec:eee:ecosys:v:42:y:2018:i:1:p:32-44 is not listed on IDEAS
    5. repec:eee:eecrev:v:95:y:2017:i:c:p:125-141 is not listed on IDEAS

    More about this item

    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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