Lending standards, credit booms and monetary policy

Arbeitspapier

This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 1411

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy
• Subject: Bank lending standards ; Credit supply ; Monetary policy ; Risk channel

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Afanasyeva, Elena ; Güntner, Jochen
• Event: Veröffentlichung
• (who): Johannes Kepler University of Linz, Department of Economics
• (where): Linz
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/115128
• Last update: 10.03.2025, 11:43 AM CET