Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel? |
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| Institution: | 1. Helmut-Schmidt-Universität, Holstenhofweg 85, 22043 Hamburg, Germany;2. Deutsche Bundesbank – Hannover, Georgsplatz 5, 30159 Hannover, Germany;3. Centre for Applied Macroeconomic Analysis, Australian National University, Canberra, Australia;4. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany;5. Reserve Bank of New Zealand, 2 The Terrace, PO Box 2498, Wellington 6140, New Zealand |
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| Abstract: | In this paper I compare a traditional demand oriented model of bank lending with its focus on short-term interest rates in the money market, to a non-traditional capital budgeting model of bank lending based on movements in share valuations for the Euro area. Using non-nested hypothesis tests, omitted variables tests, and Granger Causality tests, I reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions (MFI's) in the Euro area. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions and allocation of resources in Europe. One possible policy implication of this research is that the central bank should try and stabilize stock prices in order to achieve their goal of stabilizing bank lending and the economy. |
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| Keywords: | Bank loans Stock market Non-nested hypothesis tests E3 E5 G2 |
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