The role of banks in the Czech monetary policy transmission mechanism

Author: Pruteanu-Podpiera, Anca Maria

Source: Economics of Transition, Volume 15, Number 2, April 2007 , pp. 393-428(36)

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Abstract:

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996-2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999-2001 than in the period 1996-1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996-1998: I find cross-sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999-2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel.

Keywords: Monetary transmission mechanism; bank lending channel; credit rationing; broad credit channel; Czech Republic; E48; E52; E51; E58; G21

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0351.2007.00281.x

Publication date: 2007-04-01