Skip to main content
SpringerLink
Log in

The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

We test whether the credit channel of the monetary policy was present in the United States’ economy from January 2001 to April 2016. To this end, we use a factor-augmented vector autoregression, and we impose sensible theoretical sign restrictions in our structural identification scheme. We use the expected substitution effect between bank commercial loans and commercial papers to identify the credit supply channel. We found that the credit channel appears to have operated in the US economy during the sample period. However, when we split the sample, we found that the credit channel did not operate after the subprime crisis (close to the Zero Lower Bound of the interest rate). This result is robust to changing the sign restriction horizons. It supports current views in the literature regarding the ineffectiveness of the credit channel as a means to foster real economic activity during crises episodes.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11
Fig. 12
Fig. 13
Fig. 14

Similar content being viewed by others

Notes

  1. See Boivin et al. (2010) for a recent survey of this literature.

  2. Such standard conditions can be found for instance in Lütkepohl (2006).

  3. We also attempted to identify the response of the bank loans to an interest rate shock, using a traditional Cholesky factorization, and also imposing a decreasing in the issuing of commercial papers 1 month after the shock, and setting free bank loans. In both cases, we were not able to identify plausible scenarios, in the sense that the estimated IRFs of traditional variables such as economic activity or prices, presented counterintuitive dynamics after the shocks. These results are available upon request.

  4. We assume that the full set of variables in the FAVAR \(X_{t}\) is related to the factors as follows: \(X_{t} = \varLambda^{f} \varvec{F}_{\varvec{t}} + \varLambda^{y} \varvec{Y}_{\varvec{t}} + e_{t}\), where \(\varLambda^{f}\) is an N × K matrix of unobservable factor loadings that contains the loadings \(\lambda_{i}^{K}\) and \(\varLambda^{y}\) is an N × M observable matrix of factor loadings.

  5. This is the minimal order for which the residuals are uncorrelated in time.

  6. We also estimate our model using subsets of variables seeking to identify each factor directly, instead of recovering them from the whole data set. All the qualitative results reported in what follows remain and they are available upon request.

  7. The shocks are symmetric, so it makes no difference in the argument to instead claim a reduction in the market interest rate.

  8. We have rotated the sing of the IRF associated to the price factor to present the results in a more intuitive fashion. Note that factor is identified up to a column sign rotation and in our case, it presents a negative correlation with the price series.

  9. Our results are robust to reducing the number of factors to two factors (this increasing the degrees of freedom), in the pre-ZLB and post-ZLB sample periods.

References

  • Adams-Kane J, Jia Y, Lim J (2015) Global transmission channels for international bank lending in the 2007–09 financial crisis. J Intern Money Financ 56:97–113

    Article  Google Scholar 

  • Apergis N, Christou C (2015) The behaviour of the bank lending channel when interest rates approach the zero-lower bound: evidence from quantile regressions. Econ Model 49:296–307

    Article  Google Scholar 

  • Bai J, Ng S (2002) Determining the number of factors in approximate factor models. Econometrica 70:191–221

    Article  Google Scholar 

  • Belviso F, Milani F (2006) Structural factor-augmented VARs (SFAVARs) and the effects of monetary policy. Top Macroecon 6(2):1–46

    Google Scholar 

  • Bernanke B, Blinder A (1988) Credit, money, and aggregate demand. Am Econ Rev 78:435–439

    Google Scholar 

  • Bernanke B, Blinder A (1992) The Federal funds rate and the channels of monetary transmission. Am Econ Rev 82:901–921

    Google Scholar 

  • Bernanke B, Gertler M (1995) Inside the black box. J Econ Perspect 9:27–48

    Article  Google Scholar 

  • Bernanke B, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. Quart J Econ 120:387–422

    Google Scholar 

  • Boivin J, Kiley M, Mishkin F (2010) How has the monetary transmission mechanism evolved over time? In: Friedman B, Woodford M (eds) Handbook of monetary economics, vol 3. Elsevier, Amsterdam, pp 369–422

    Chapter  Google Scholar 

  • Bordo M, Duca J, Koch C (2016) Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades. J Financ Stab 26:90–106. https://doi.org/10.1016/j.jfs.2016.07.002

    Article  Google Scholar 

  • Canova F, De Nicolo G (2002) Monetary disturbances matter for business fluctuations in the G-7. J Mon Econ 49:1131–1159

    Article  Google Scholar 

  • D’Amico S, Farka M (2011) The fed and the stock market: an identification based on intraday futures data. J Bus Econ Stat 29(1):126–137

    Article  Google Scholar 

  • Dave C, Dressler S, Zhang L (2013) The bank lending channel: a FAVAR analysis. J Money Credit Bank 45:1705–1720

    Article  Google Scholar 

  • Eickmeier S, Lemke W, Marcellino M (2015) Classical time varying factor-augmented vector auto-regressive models-estimation, forecasting and structural analysis. J R Stat Soc Ser A Stat Soc 178:493–533

    Article  Google Scholar 

  • Ellis C, Mumtaz H, Zabczyk P (2014) What lies beneath? A time-varying FAVAR model for the UK transmission mechanism. Econ J 124:668–699

    Article  Google Scholar 

  • Endut N, Morley J, Tien P-L (2017) The changing transmission mechanism of US monetary policy. Empir Econ. https://doi.org/10.1007/s00181-017-1240-7

    Article  Google Scholar 

  • Faust J (1998) The robustness of identified VAR conclusions about money. Carnegie-Rochester Ser Public Policy 49:207–244

    Article  Google Scholar 

  • Fry R, Pagan A (2011) Sign restrictions in structural vector autoregressions: a critical review. J Econ Lit 49(4):938–960

    Article  Google Scholar 

  • Galí J (2015) Monetary policy, inflation and the business cycle: an introduction to the New Keyensian framework and its applications. Princeton University Press, Princeton

    Google Scholar 

  • Hicks J (1937) Mr. Keynes and the “Classics”; a suggested interpretation. Econometrica 5:147–159

    Article  Google Scholar 

  • Jimborean R, Méesonnier J (2010) Bank’s financial conditions and the transmission of monetary policy a FAVAR approach. Intern J Cent Bank 6:71–117

    Google Scholar 

  • Jorgenson D (1963) Capital theory and investment behavior. Am Econ Rev 53:247–259

    Google Scholar 

  • Kashyap A, Stein J (1995) The impact of monetary policy on bank balance sheets. Carnegie-Rochester Conf Ser Public Policy 42:151–195

    Article  Google Scholar 

  • Kashyap A, Stein J, Wilcox D (1993) Monetary policy and credit conditions: evidence from the composition of external finance. Am Econ Rev 83:78–98

    Google Scholar 

  • Keating J, Kelly L, Valcarcel J (2014) Solving the price puzzle with an alternative indicator of monetary policy. Econ Lett 124(2):188–194

    Article  Google Scholar 

  • Kwan S (2010). Financial crisis and bank lending. Fed Reserv Bank of San Franc, Working Paper No. 2010–11

  • Lütkepohl H (2006) New introduction to multiple time series analysis. Springer, Berlin

    Google Scholar 

  • Mundell R (1963) Capital mobility and stabilization policy under fixed and flexible exchange rates. Can J Econ Political Sci 29:475–485

    Article  Google Scholar 

  • Munir K, Qayyum A (2014) Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach. Empir Econ 46(3):843–864

    Article  Google Scholar 

  • Obstfeld M, Rogoff K (1995) The mirage of fixed exchange rates. J Econ Perspect 9:73–96

    Article  Google Scholar 

  • Olmo J, Sanso-Navarro M (2015) Changes in the transmission of monetary policy during crisis episodes: evidence from the euro area and the U.S. Econ Model 48:155–166

    Article  Google Scholar 

  • Peek J, Rosengren E (2012) The role of banks in the transmission of monetary policy. In: Allen B, Molyneux P, Wilson J (eds) The Oxford Handbook of Banking. Oxford University Press, Oxford

    Google Scholar 

  • Sims C (1980) Macroeconomics and reality. Econometrica 48(1):1–48

    Article  Google Scholar 

  • Stock J, Watson M (2012) Disentangling the channels of the 2007–09 recession. Brook Pap Econ Act 44:81–135

    Article  Google Scholar 

  • Swanson E, Williams J (2014) Measuring the effect of the zero lower bound on medium- and longer-term interest rates. Am Econ Rev 104:3154–3185

    Article  Google Scholar 

  • Tobin J (1969) A general equilibrium approach to monetary theory. J Money Credit Bank 1:15–29

    Article  Google Scholar 

  • Uhlig H (2005) What are the effects of monetary policy on output? results from an agnostic identification procedure. J Monet Econ 52:381–419

    Article  Google Scholar 

  • Vera D (2012) How responsive are banks to monetary policy? Appl Econ 44:2335–2346

    Article  Google Scholar 

  • Woodford M (2003) Interest and prices: foundations of a theory of monetary policy. Princeton University Press, Princeton

    Google Scholar 

  • Xia F, Wu C (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. J Money Credit Bank 48(2–3):253–291

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Universidad del Valle, Cali, Colombia

    Juan S. Holguín

  2. Department of Economics and Business Studies, Open University of Catalonia, Barcelona, Spain

    Jorge M. Uribe

  3. Riskcenter, University of Barcelona, Barcelona, Spain

    Jorge M. Uribe

Authors
  1. Juan S. Holguín
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jorge M. Uribe
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jorge M. Uribe.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Figs. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and 14, Tables 1, 2, and 3.

Table 3 Series and transformations to achieve stationarity
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Holguín, J.S., Uribe, J.M. The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions. Empir Econ 59, 2443–2472 (2020). https://doi.org/10.1007/s00181-019-01759-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-019-01759-5

Keywords

JEL Classification

Search

Navigation