Bank Lending Policy in Brazil

Abstract

This paper aims at revisiting the empirical evidence on the bank lending channel of monetary transmission in Brazil. We analyse banks’ balance sheet monthly data for the period from December 1994 to December 2001. For industrialized countries, the monetary policy instrument usually considered in empirical studies is a short-term interest rate under the central bank control. This is also the indicator used by Graminho and Bonomo (2002). We argue that the short-term interest rate only partially captures the monetary stance in Brazil. When we consider a broader indicator of monetary policy that encompass all the required reserves on different types of bank deposits (demand, savings, and time deposits), we argue that there is evidence for a transmission mechanism working through bank lending. The bank lending channel is a particular case of the broad credit channel due to its emphasis on just one source of external financing (namely, the supply of bank loans) in the monetary policy transmission. Most of the early empirical research on the bank lending channel made use of aggregate time-series data.