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Bank lending channel in India: evidence from state-level analysis

Listed author(s):
  • Vipul Bhatt

    ()

  • N. Kishor

    ()

This paper seeks to answer two questions: first, do monetary policy shocks affect the size of bank loans, and second, do bank loans affect real economic activity? Using annual panel data on the Indian states from 1996 to 2008, we find that money demand shocks have large and statistically significant impact on bank loans. Furthermore, using money demand shocks as instruments for bank lending à la Driscoll (J Monet Econ 51:451–471, 2004 ), we find an economically large and statistically significant effect of bank loans on output. Our findings, to some extent, reflect the dominant role played by banks in the India’s overall financial system. Copyright Springer-Verlag Berlin Heidelberg 2013

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File URL: http://hdl.handle.net/10.1007/s00181-012-0657-2
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 45 (2013)
Issue (Month): 3 (December)
Pages: 1307-1331

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Handle: RePEc:spr:empeco:v:45:y:2013:i:3:p:1307-1331
DOI: 10.1007/s00181-012-0657-2
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/econometrics/journal/181/PS2

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  1. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
  2. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, vol. 133(1), pages 97-126, July.
  3. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
  4. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
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  11. Ashcraft, Adam B., 2006. "New Evidence on the Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 751-775, April.
  12. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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  15. Rondorf, Ulrike, 2012. "Are bank loans important for output growth?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 103-119.
  16. Rakesh Mohan, 2008. "Monetary policy transmission in India," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 259-307 Bank for International Settlements.
  17. Subramanian S. Sriram, 2001. "A Survey of Recent Empirical Money Demand Studies," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1-3.
  18. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
  19. Samolyk, Katherine A., 1994. "Banking conditions and regional economic performance evidence of a regional credit channel," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 259-278, October.
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