Test of the Bank Lending Channel: The Case of Australia

Yu Hsing
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Yu Hsing: Southeastern Louisiana University

Economics Bulletin, 2013, vol. 33, issue 4, 2575-2582

Abstract: Extending Bernanke and Blinder (1988, 1992), Kashyap and Stein (2000), Peek and Rosengren (2010) and others, this paper incorporates two additonal variables - the world interest rate and the exchange rate - into the bank loan supply function. The results show that the demand for bank loans is negatively affected by the lending rate and positively influenced by the interest rate on bonds and real GDP and that the supply of bank loans is positively associated with the lending rate, bank deposits and appreciation of the Australian dollar and negatively impacted by the world interest rate and the cost of borrowings as represented by the target cash rate. Therefore, the bank lending channel is confirmed. In monetary easing, the Reserve Bank of Australia can engage in open market operations to buy government bonds to increase bank deposits/reserves or lower the target cash rate to reduce the cost of borrowings. Both measures will cause the supply of bank loans to rise.

Keywords: Bank lending channel; monetary policy; exchange rates; world interest rates; 3SLS (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2013-10-08
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Citations: View citations in EconPapers (1)

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