Credit channels in Europe: bank-level panel data analyses
This paper uses disaggregated data on bank balance sheets to test the existence of credit channels of monetary policy transmission in a broad sense in Europe for the years 1990-1995. On the basis of a theoretical model, it is argued that the existence of a bank lending channel implies that banks with liquid and less liquid balance sheets, and large and small banks respond differently to changes in the stance of monetary policy. In addition, the balance sheet channel is taken into account by examining loan demand in relation to bank size. The empirical results provide support for the existence of credit channels of monetary policy transmission in continental Europe. The bank lending channel is found to be particularly strong in Germany, Belgium and the Netherlands, while the balance sheet channel is relatively strong in again Germany and to a lesser extent also in Italy. On the one hand, banks in France and Italy seem to have faced liquidity constraints during the sample period. On the other, the empirical results show that in France and Italy a bank lending channel also exists when the stance of monetary policy is not measured by the change in the short-term interest rate but by a monetary conditions index, which also takes into account dollar exchange rate developments. In the United Kingdom, however, credit channels seem to be non-existent or are dominated by loan and deposit demand factors of bank customers.
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