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Monetary Policy Uncertainty and Bank Credit Allocation

Author

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  • Altunok, Fatih
  • Arslan, Yavuz
  • Ongena, Steven

Abstract

We analyze how monetary policy uncertainty (MPU) affects bank credit allocation. First, we develop a theoretical model in which MPU consumes banks’ risk-bearing capacity. Higher MPU therefore curbs risky lending, most strongly at less capitalized banks. Second, we test this prediction across U.S. credit markets using FOMC-announcement changes in option implied rate uncertainty, controlling for the monetary policy stance. In syndicated lending, a one standard deviation increase in MPU widens the gap between high- and low-capital banks in lending to riskier relative to safer borrowers by 1.65 percent. Small business and mortgage originations show similar patterns, consistent with this mechanism.

Suggested Citation

  • Altunok, Fatih & Arslan, Yavuz & Ongena, Steven, 2026. "Monetary Policy Uncertainty and Bank Credit Allocation," CEPR Discussion Papers 22050, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:22050
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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