Monetary Policy, Uncertainty, and Credit Supply

This paper investigates how dispersion in banks’ subjective inflation forecasts is a channel of the transmission of monetary policy to credit supply. We extend the Monti--Klein model of monopolistic banking by incorporating risk aversion, subjective beliefs, and ambiguity aversion. The model predicts that greater inflation uncertainty or asymmetry in beliefs raises equilibrium loan rates and amplifies credit rationing. Using AnaCredit loan-level data for France, we estimate finite-mixture density regressions that allow for latent heterogeneity in loan pricing. Empirically, we find that higher subjective uncertainty and asymmetry both increase average lending rates and skew their distribution, disproportionately affecting financially constrained firms in the right tail. Quantitatively, moving from the 25th to the 75th percentile of our indicators raises average borrowing costs by more than 10 basis points, which translates into roughly 0.5 billion euros of additional annual interest expenses for non-financial corporations. By contrast, forecast disagreement has a weaker and less systematic effect. Taken together, these results show that uncertainty and asymmetry in inflation expectations are independent and powerful drivers of credit conditions, underscoring their importance for understanding monetary policy transmission through the banking sector.