Firm balance sheets and monetary policy transmission

The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These b...

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Bibliographic Details
Published in:Journal of monetary economics 2007-09, Vol.54 (6), p.1515-1528
Main Authors: Ashcraft, Adam B., Campello, Murillo
Format: Article
Language:English
Subjects:
Accounting
Balance sheet channel
Balance sheets
Bank holding companies
Banking
Capital market
Capital markets
Credit systems
Enterprises
Financial conglomerates
Financial constraints
Financial institutions
Internal capital markets
Lending
Monetary policy
Studies
Subsidiaries
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Summary:The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These banks face the same marginal cost of funds due to internal capital markets, but face different borrowers as they concentrate their lending with small local businesses. Exploring cross-sectional variation in local economic conditions across these subsidiaries, we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy. Our results are consistent with a demand-driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2007.03.003