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The Lack of Persistence of Interest Rate Changes on Banks’ Lending and Risk Taking Behaviour

Nektarios Michail, Demetris Koursaros () and Christos Savva ()

No 2016-1, Working Papers from Central Bank of Cyprus

Abstract: Using the shock persistence methodology of Lee, Pesaran and Pierse (1992), we examine whether monetary policy has persistent effects on bank lending behaviour, both directly through the credit channel and indirectly through the risk-taking and liquidity channels. The findings suggest that policy actions aimed at affecting credit risk and bank lending will not have any persistent effects if only the interest rate is employed. Macro-prudential policy should focus on other factors which affect lending decisions, notably the liquidity channel which appears to be an important determinant of the level of lending.

Keywords: bank lending; persistence; euro area; monetary policy; interest rate (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016-02
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