The Effect of Monetary Tightening on Local Banks
41 Pages Posted: 23 Sep 2008
Date Written: September 2008
Abstract
This study shows that during Paul Volcker's drastic monetary tightening in the early 1980s, local banks operating in only one county reduced loan supply much more sharply than local subsidiaries of multi-county bank holding companies in similar markets, after controlling for bank (and holding company) size, liquidity, capital conditions, and, most important, local credit demand. The study allows cleaner identification by examining 18 U.S. "county-banking states" where a bank's local lending volume at the county level was observable because no one was allowed to branch across county borders. The local nature of lending allows us to approximate and control for the exogenous component of local loan demand using the prediction that counties with a higher share of manufacturing employment exhibit weaker loan demand during tightening (which is consistent with the interest rate channel and the balance-sheet channel of monetary policy transmission). The study sheds light on the working of the bank lending channel of monetary policy transmission.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Gert Peersman and Frank Smets
-
Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism
-
Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism
-
The Monetary Transmission Mechanism: Evidence from the G-7 Countries
By Stefan Gerlach and Frank Smets
-
Monetary Transmission in the Euro Area: Where Do We Stand?
By Ignazio Angeloni, Anil K. Kashyap, ...
-
Financial Systems and the Role of Banks in Monetary Policy Transmission in the Euro Area
By Michael Ehrmann, Leonardo Gambacorta, ...
-
A VAR Description of the Effects of Monetary Policy in the Individual Countries of the Euro Area
By Benoit Mojon and Gert Peersman
-
Some Stylised Facts on the Euro Area Business Cycle
By Anna Maria Agresti and Benoit Mojon
-
By Ignazio Angeloni, Anil K. Kashyap, ...
-
By Ignazio Angeloni, Anil K. Kashyap, ...