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Banks' financial conditions and the transmission of monetary policy: a FAVAR approach

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  • Jimborean, R.
  • Mésonnier, J-S.

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 sheets structure. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point 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

  • Jimborean, R. & Mésonnier, J-S., 2010. "Banks' financial conditions and the transmission of monetary policy: a FAVAR approach," Working papers 291, Banque de France.
  • Handle: RePEc:bfr:banfra:291
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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. repec:eee:eecrev:v:95:y:2017:i:c:p:125-141 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Jean-Stéphane Mésonnier & Dalibor Stevanovic, 2012. "Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment," CIRANO Working Papers 2012s-23, CIRANO.
    5. repec:eee:ecosys:v:42:y:2018:i:1:p:32-44 is not listed on IDEAS

    More about this item

    Keywords

    Monetary transmission; Credit channel; Factor Augmented Vector Autoregression (FAVAR).;

    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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