Working Paper: CEPR ID: DP10230
Authors: Prachi Mishra; Peter J. Montiel; Peter Pedroni; Antonio Spilimbergo
Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emergingeconomies
Keywords: Bank Lending; Monetary Policy; Structural Panel VAR
JEL Codes: E5; O11; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Bank lending rates (G21) |
| Better institutional environments (O17) | More effective monetary policy transmission (E52) |
| More developed financial systems (F65) | More effective monetary policy transmission (E52) |
| More competitive banking sectors (F65) | More effective monetary policy transmission (E52) |
| Low-income countries (F63) | Weaker transmission of monetary policy shocks to bank lending rates (E52) |
| Weaker institutions and less developed financial structures (F65) | Weaker transmission of monetary policy shocks to bank lending rates in low-income countries (F65) |