Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: a FAVAR Analysis

Chetan Dave, Scott Dressler () and Lei Zhang ()

No 44, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: Has paying interest on excess reserves (IOER) impacted monetary policy transmission? We employ a factor-augmented VAR (i.e. FAVAR) to analyze a traditional bank lending channel (BLC) as well as a potential reserves channel. Our main results are: (i) the bank-lending response to an exogenous monetary policy innovation in the Federal Funds rate (i.e. the BLC) remains active but smaller than pre-2008 measures; (ii) the bank-lending response to any IOER-based liquidity innovations (i.e. the reserves channel) either mimics the BLC or is largely insignificant. These results provide little evidence that IOER has significantly impacted bank lending or monetary transmission.

Keywords: Bank Lending Channel; FAVAR; IOER; Monetary Policy (search for similar items in EconPapers)
JEL-codes: C32 E51 E52 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Working Paper: Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:44

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