Euro area bank lending channel shows synchronous timing, varied impact
A new Oesterreichische Nationalbank (OeNB) study reveals that monetary policy transmission to bank lending in the euro area consistently peaks within 12 to 18 months. However, the magnitude of these effects varies significantly across countries and is asymmetric, with expansionary policy having a stronger impact.
Peak effects within 18 months, but strength varies
The study, conducted by Robert Ferstl and Bernhard Graf, investigates the transmission of monetary policy to bank lending across euro area countries.
It finds that the peak effects of monetary policy actions consistently materialize within 12 to 18 months.
However, the magnitude of these effects varies considerably, with some countries experiencing impacts up to three times larger than others.
The research also highlights an asymmetry: expansionary monetary policy affects bank lending more strongly than contractionary policy.
These findings have remained stable over the past several years, including during the COVID-19 pandemic and the recent monetary policy normalization cycle, suggesting the underlying transmission mechanism has not materially changed.
Unpacking country-specific transmission dynamics
To analyze these dynamics, the authors employ instrumental variables based on common euro area-wide high-frequency identified monetary policy surprises, combined with local projections.
This methodology allows for a flexible specification that accounts for potential asymmetries in responses to easing versus tightening shocks, focusing on loan growth to non-financial corporations.
The research was conducted within the 'Challenges for Monetary Policy Transmission in a Changing World Network' (ChaMP), a collaborative effort involving economists from the European Central Bank (ECB) and national central banks (NCBs) of the Eurosystem.
Crucial insights for tailored policy
This research underscores the complex reality of a single monetary policy's varied impact across euro area economies.
Recognizing this country-specific and asymmetric transmission is crucial for effective policy calibration and communication.
Supervisors can leverage these findings to better assess the differentiated resilience of national banking sectors.