Bank lending channel in India: evidence from state-level analysis

Vipul Bhatt () and N Kishor

Empirical Economics, 2013, vol. 45, issue 3, 1307-1331

Abstract: This paper seeks to answer two questions: first, do monetary policy shocks affect the size of bank loans, and second, do bank loans affect real economic activity? Using annual panel data on the Indian states from 1996 to 2008, we find that money demand shocks have large and statistically significant impact on bank loans. Furthermore, using money demand shocks as instruments for bank lending à la Driscoll (J Monet Econ 51:451–471, 2004 ), we find an economically large and statistically significant effect of bank loans on output. Our findings, to some extent, reflect the dominant role played by banks in the India’s overall financial system. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Bank lending; Monetary policy transmission; Money demand; India; Central Bank; E41; E42; E51; E52; E58 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00181-012-0657-2

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