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

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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," Villanova School of Business Department of Economics and Statistics Working Paper Series 44, Villanova School of Business Department of Economics and Statistics.
    • Handle: RePEc:vil:papers:44
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    1. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
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    Keywords

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    JEL classification:

    • 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
    • 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

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