Monetary policy announcements and bank lending: Do banks’ refinancing markets matter?

Abstract

How do bank loans respond to monetary policy shocks? The bank lending channel holds that banks' refinancing costs are crucial. This paper shows that what ultimately matters are shifts in the supply of funds available to banks. We use a structural VAR and a novel approach that combines data from the market for large certificates of deposits (jumbo CDs) and U.S. macroeconomic data from 1990Q2 to 2016Q4. We identify supply shifts on the jumbo CD market as situations when the volume and price of jumbo CDs respond with opposite signs to policy shocks. Demand shifts are characterized by responses in the same direction. We find that only if policy shocks are associated with a lower supply of funds available to banks, then loan volumes fall immediately and persistently, in line with the bank lending channel. In contrast, loan volumes remain unresponsive if policy shocks shift banks’ demand for funds.