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Banks' Financial Conditions and the Transmission of Monetary Policy: A FAVAR Approach

Ramona Jimborean and Jean-Stéphane Méesonnier
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Jean-Stéphane Méesonnier: Banque de France

Authors registered in the RePEc Author Service: Jean-Stéphane Mésonnier ()

International Journal of Central Banking, 2010, vol. 6, issue 34, 71-117

Abstract: We propose a novel approach to assess whether banks’ financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks’ liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks’ balance sheet structures. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point in monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.

JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2010
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