Synchronous but Dissimilar: Heterogeneity in the Bank Lending Channel Across the Euro Area (Robert Ferstl, Bernhard Graf)

The following study analyzes the transmission of monetary policy to bank lending in the euro area. It focuses particularly on the heterogeneity in the speed and strength of propagation of monetary policy shocks across euro area countries. We employ instrumental variables, based on common euro area wide high-frequency identified monetary policy surprises in combination with local projections, to infer the dynamic effect of monetary policy on bank lending. Local projections are estimated for loan growth to non-financial corporations, allowing for a flexible specification that accounts for potential asymmetries in responses to easing versus tightening monetary policy shocks. The robustness of inferred impulse response functions is examined during the pandemic and across different phases of the monetary policy normalization that began in 2022, including both hiking and easing cycles and extending to the end of 2024. We find that the response of bank lending to monetary policy shocks is generally synchronous across euro area countries in that impulse responses peak after 12 to 18 months. However, the magnitude of peak effects varies considerably pointing to pronounced country heterogeneity in the bank lending channel. Moreover, we find significant asymmetries in country-specific bank lending responses wherein monetary policy tightening shocks are generally less strongly propagated suggesting downward rigidity in the bank lending channel. Taken together our results help policymakers quantify the heterogeneity of common euro-area monetary policy transmission to bank lending across member countries.