Bank Lending and Monetary Shocks: Evidence from a Developing Economy

Ali Choudhary, Amjad Ali (), Shah Hussain () and Vasco Gabriel
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Shah Hussain: State Bank of Pakistan

No 45, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper investigates the role of credit market frictions in the transmission of monetary shocks in Pakistan. First, using macro data, we show that banking spreads are countercyclical, even when we control for credit risk, monetary policy and potential maturity mismatches. Moreover, we find that this anticyclical nature is accentuated in the presence of government as an active participant in the private credit market. Then, using a rich dataset on corporate loan agreement for the period 2006-2011, we find evidence that, in times of tight monetary conditions, there is an overall increase in the pass-through of policy impulses to individual loans rates. Furthermore, our evidence suggests that the impact of these shocks is disproportionately felt by borrowers and is especially biased towards less established firms. Moreover, small (weak) banks change their loan conditions the most in tight conditions. Thus, our findings support the view that the existence of a credit channel is particularly relevant for emerging economies, hence emphasizing the need for appropriate stabilization policies.

Keywords: Bank margins; credit channel; monetary policy (search for similar items in EconPapers)
JEL-codes: E4 E5 O1 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-01
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Citations: View citations in EconPapers (9)

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Working Paper: Bank Lending and Monetary Shocks: Evidence from a Developing Economy (2012)
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