Monetary policy and bank lending to small firms

► Banks adjust the mix of their loan portfolios in response to monetary tightening. ► Small US banks exhibit behavior consistent with the balance sheet channel. ► The effect appears to be driven by small borrowers rather than small lenders. This paper presents an empirical test of the balance sheet...

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Bibliographic Details
Published in:Journal of macroeconomics 2012-09, Vol.34 (3), p.741-748
Main Author: Kandrac, John
Format: Article
Language:English
Subjects:
Balance sheet channel
Balance sheets
Balance theory
Banking industry
Banking system
Borrowing
Credit channel
Economic models
Monetary policy
Panel data
Small business loans
Studies
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Summary:► Banks adjust the mix of their loan portfolios in response to monetary tightening. ► Small US banks exhibit behavior consistent with the balance sheet channel. ► The effect appears to be driven by small borrowers rather than small lenders. This paper presents an empirical test of the balance sheet channel of monetary policy. I take advantage of a panel data set containing nearly all domestic banks to search for an adjustment in lending patterns induced by changes in the stance of monetary policy. I find that in response to monetary policy tightening, banks decrease the proportion of credit extended to high-agency-cost “small” borrowers. Additionally, I provide evidence that this result is in fact driven by a balance sheet effect working on small borrowers rather than on small lenders.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2012.06.002