Ebook A Theoretical and Empirical Assessment of the Bank Lending Channel and Loan Market Disequilibrium in Poland
The transmission mechanism describes the link between monetary policy actions and their impact on real economic activity and inflation. Of course, several interrelated transmission channels may be at work. Yet, it is widely accepted that the Polish financial system is principally a bank-oriented one. This motivates our study since we seek to explain the role the banking sector plays in the transmission mechanism in Poland since 1994. More specifically, we investigate the importance of the bank lending channel and evaluate the disequilibrium in the Polish loan market.
The difficulties of the authorities’ control over credit activity prove that the Polish banking sector is a key element in understanding the efficiency of monetary policy actions during the 1990s (Polanski, 1998; Brzoza-Brzezina, 2000).
Following Bernanke and Blinder’s (1988a,b) seminal article, the main result presented in the bank lending channel literature states that the imperfect substitutability between bonds and loans generates an amplification of monetary policy shocks when compared to the traditional money (or interest rate) channel.
The bank lending channel makes monetary policy more restrictive (expansionary) than in a standard IS/LM model because of an independent effect that emanates from the asset side of the banking sector, which reduces (increases) the loan supply to “bank-dependent” borrowers. The variations in both the credit supply and the spread between loan and bond interest rates summarize the amplifying nature of the bank lending channel: the interest rate spread increases (decreases) and the supply of credit decreases (increases) in the event of a restrictive (expansionary) monetary policy (Bernanke, 1993).
Kierzenkowski (2001) makes a critical assessment of Bernanke and Blinder’s results, demonstrating that they are not general since they require special assumptions (see Bernanke and Blinder (1988a) for their detailed exposition). The bank lending channel can either amplify or attenuate the effects of the traditional interest rate channel. He establishes that, as a general rule, the direction of change in the spread between loan and bond interest rates after a monetary policy shock is a good indicator for distinguishing between these two effects. Following a monetary tightening (expansion) there is an increase (decrease) in the interest rate spread in the event of amplification effects and a decrease (increase) when monetary policy shocks are attenuated.
However, these testable implications cannot be used for empirical investigations in Poland, since Polish monetary authorities use an interest rate and not, as assumed in the model, a base money target policy. Therefore, in section 1, we develop a simple aggregate-demand-and-supply (hereafter AD/AS) credit-augmented model more in line with the conduct of the monetary policy in Poland, assuming an interest rate monetary control, flexible prices of goods and an imperfect nominal wage indexation. In section 2, we apply the testable implications of the model to provide an assessment of the bank lending channel in Poland.
An empirical identification of a disequilibrium in the loan market is of primary importance for the conduct of monetary policy. The disequilibrium results from market imperfections leading to an incomplete price adjustment of the loan interest rate and therefore to a possible distortion of monetary policy impulses. We deal with this issue estimating a regime-switching model that allows for two regimes in order to characterize the annual growth rate of the quantity of loans extended to Polish firms.
A demand (supply) regime occurs if the growth rate of the quantity of loans is determined by the variables and their parameters associated with the annual increase in loan demand (supply). In section 3, we precisely describe the theoretical methodology used in the paper, outlining different points that one must be aware of in order to get consistent estimators. In section 4, we present the specification research and the final results that we analyze in the Polish monetary policy context.
In our theoretical model of transmission we assume that the loan interest rate is perfectly flexible, thus clearing the loan market. This is a standard assumption made in the bank lending channel literature. Therefore, in section 5, we investigate empirically whether the existence of a loan market disequilibrium precludes the action of the aforementioned transmission channel.
Contents
Introduction
1 A Simple Model of the Bank Lending Channel
- 1.1 General Assumptions
1.2 Comparative Statics of an Interest Rate Monetary Shock
1.3 The Variations in the Interest Rate Spread as an Indicator of Amplification and Attenuation Effects
2 An Empirical Assessment of the Bank Lending Channel
3 A Simple Regime-Switching Model
- 3.1 ML Estimation of Parameters
3.2 Initial Conditions
3.3 Probability of Both Regimes
4 An Empirical Assessment of the Loan Market Disequilibrium
- 4.1 Data
4.2 Specification Research
4.3 The Final Specification
4.4 The Robustness of the Final Specification
5 Linking the Bank Lending Channel and the Disequilibrium Loan Market Analysis
Conclusion
References
- Appendix A. Marginal Densities of ?Qt
Appendix B. Particular Case: ?12 = 0
Appendix C. Data Description; an Alternative Specification of Model 3
Appendix D. Model 3 with CPI Adjusted Variables
Appendix E. Model 3 with PPI Adjusted Variables
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