Monetary Policy and Nonfinancial Business Loans: an SVAR approach Open Access

Abstract

This paper investigates the issue of how monetary policy affects loans of public and private firms through the balance sheet and bank lending channel within a SVAR framework. The time period of the analysis stretches from 1973Q1 to 2007Q4. In order to precisely answer this question, this paper takes three empirical difficulties into account. First, in order to avoid the potential endogeneity problem of using monetary aggregates as an indicator of monetary policy, this paper uses the federal funds rate to indicate the stance of monetary policy. Second, firms' inventory is treated as a proxy for loan demand. However, this proxy only provides a qualitative measure of firms' loan demand. Third, this paper uses net worth of firms and commercial banks to differentiate the balance sheet and bank lending channel respectively. While the impulse response functions show that the balance sheet channel plays an important role in transmitting a monetary policy shock to loans of both public and private firms, there is no sufficient evidence to suggest that the bank lending channel is effective. More importantly, the balance sheet channel has more pronounced effects on loans of private firms than on loans for public firms.

Table of Contents

Table of Contents

1 Introduction 1

2 Literature Review 5

3 Methodology and Data 11

3.1 Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.2 Specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3.3 Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

3.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

4 Empirical Results 17

4.1 Public Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

4.2 Private Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 Conclusion 24

6 Appendix 30

About this Honors Thesis

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School	Emory College
Department	Economics and Mathematics
Degree	BA
Submission	Honors Thesis
Language	English
Research Field	Economics, General Economics, Finance Business Administration, Banking
Keyword	Business Loans Public Policy Monetary Economics
Committee Chair / Thesis Advisor	Yue, Zhanwei, Emory University
Committee Members	Zha, Tao, Emory University Yang, Shanshuang, Emory University Tschinkel, Sheila L, Emory University Seitaridou, Effrosyni, Emory University

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