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Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis

Author

Listed:
  • Chetan Dave

    (University of Alberta, Department of Economics)

  • Scott J. Dressler

    (Villanova University)

  • Lei Zhang

    (North Dakota State University)

Abstract

Has paying interest on excess reserves (IOER) impacted monetary policy transmission? We employ a factor augmented VAR (i.e. FAVAR) to analyze a traditional bank lending channel (BLC) as well as a potential reserves channel. Our main results are: (i) the bank-lending response to an exogenous monetary policy innovation in the Federal Funds rate (i.e. the BLC) remains active but smaller than pre-2008 measures; (ii) the bank-lending response to any IOER-based liquidity innovations (i.e. the reserves channel) either mimics the BLC or is largely insignificant. These results provide little evidence that IOER has significantly impacted bank lending or monetary transmission.

Suggested Citation

  • Chetan Dave & Scott J. Dressler & Lei Zhang, 2020. "Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis," Working Papers 2020-06, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2020_006
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    References listed on IDEAS

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    1. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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