Bank Lending Channel of Monetary Policy: Empirical Evidence from Bank Level Data of Selected Emerging Economies

Abstract

Examining the effects of monetary policy on the bank lending channel is the main objective of this study on a sample of 18 emerging economies from 2006 to 2021 by using bank-level data. Research shows that the bank lending channel does operate and is functional in the banking sectors of the developing countries that were selected for the sample. The econometric models used in the study include sys-GMM, fixed effects, and instrumental variable regression. In particular, results suggest that monetary policy (or monetary tightening) negatively affects whereas economic growth positively influences bank lending. The specific characteristics of bank variables (i.e., liquidity and size) also expand bank lending. One of the most important factors in reducing the negative impact of monetary policy is the size and liquidity of banks. It has been reported through the robustness check exercise that the results largely remain robust when instrumental variable regression is used and when pandemic years are eliminated from the data sample. This research includes significant implications for policy for the selected emerging economies.