![]() |
What is the Bank Lending Channel of Monetary Policy Transmission? |
The mechanism by which monetary policy is transmitted to the real economy remains a central topic in macroeconomics. The bank lending channel represents the credit view of this mechanism. According to this view, monetary policy works by affecting bank assets (loans) as well as banks’ liabilities (deposits). The key point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank loans. For instance, an expansionary monetary policy that increases bank reserves and bank deposits increase the quantity of bank loans available. Where many borrowers are dependent on bank loans to finance their activities, this increase in bank loans will cause a rise in investment (and also consumer) spending, leading ultimately to an increase in aggregate output, (Y). The schematic presentation of the resulting monetary policy effects is given by the following:
M ↑ → Bank deposits ↑ → Bank loans ↑ →I ↑ → Y ↑
(Note: M= indicates an expansionary monetary policy leading to an increase in bank deposits and bank loans, thereby raising the level of aggregate investment spending, I, and aggregate demand and output, Y, ).
In this context, the crucial response of banks to monetary policy is their lending response and not their role as deposit creators. The two key conditions necessary for a lending channel to operate are: (a) banks cannot shield their loan portfolios from changes in monetary policy; and (b) borrowers cannot fully insulate their real spending from changes in the availability of bank credit.
The importance of the credit channel depends on the extent to which banks rely on deposit financing and adjust their loan supply schedules following changes in bank reserves; and also the relative importance of bank loans to borrowers. Consequently, monetary policy will have a greater effect on expenditure by smaller firms that are more dependent on bank loans, than on large firms that can access the credit market directly through stock and bond markets (and not necessarily through the banks).
Central Bank of Nigeria (CBN) Education
Enjoy this article? Feel free to share your comment, idea or opinion in the comment section
Related Articles
|
Break Bad Habits and Take Control of Your Life with these Practical Steps!Habits are common to everyone. It doesn’t matter who you are, your sex or background, we all have them. But the type of habit you have could be the difference between a great life, or one you have no control over.
When it comes to habits, in a nutshell, they fall into 2 categories – g [Read more]
|
Posted: 9 years ago |
|
Gain Report: Nigeria - Grain and feed annualReport Highlights: Although Nigeria dropped from the number one export destination in the world for U.S. wheat in MY2010/11 to third position this year, it remains the most consistent and loyal customer. Sales as of April1 are a record 3.5 million tons, up from 3.3 million tons last year. Consumptio [Read more]
|
Posted: 17 years ago |
|
Who Is In Charge? You or the Child?Who is in charge of that challenging situation? Is it you or the child? In my past articles I have encouraged children to be given freedom of expression but when they push the boundaries consistently, who is in control? I quite understand the frustrations that adults face when they [Read more]
|
Posted: 13 years ago |
