How does uncertainty drive the bank lending channel of monetary policy?

Abstract

The literature has ignored the mediating role of uncertainty in the link between monetary policy and bank lending. Using data from commercial banks in Vietnam from 2007 to 2019, this article expands the literature stream on monetary policy transmission by investigating the impact of uncertainty on the bank lending channel. We employ the variability of shocks to bank-specific factors to measure banking uncertainty and a set of interest- and money-supply-based instruments to capture monetary indicators. We reveal that bank loan growth may increase in response to monetary expansion when the regulatory authority lowers interest rates or increases liquidity injection. Further analysis shows that this bank lending channel is less effective with increased uncertainty in the banking sector. Our finding firmly holds with the generalized method of moments (GMM) estimator and the least squares dummy variable corrected (LSDVC) technique.