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The bank lending channel in Romania -Solving the Supply versus Demand Puzzle-

DOCTORAL SCHOOL OF FINANCE AND BANKING. The bank lending channel in Romania -Solving the Supply versus Demand Puzzle-. Student: Stoica Mihai Supervisor: Professor Moisă Altăr. Theoretical background.

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The bank lending channel in Romania -Solving the Supply versus Demand Puzzle-

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  1. DOCTORAL SCHOOL OF FINANCE AND BANKING The bank lending channel in Romania-Solving the Supply versus Demand Puzzle- Student: Stoica Mihai Supervisor: Professor Moisă Altăr

  2. Theoretical background According to the bank lending channel transmission mechanism, banks respond to a monetary contraction by reducing the supply of bank loans. • Two conditions must hold simultaneously for the bank lending framework to be valid: • the central bank must be able simply by conducting monetary policy measures to influence the supplyof bank loans- i.e.banks are not able to frictionlessly substitute the out-flowing deposits • some firms must be dependent on bank loans- i.e. firms are not able to frictionlessly substitute between bank loans and another types of loans due to information problems

  3. Identification of the bank lending channel Bernanke and Blinder (1992)- they observe the reaction of the aggregate bank lending to a change in monetary policy stance Kashyap and Stein (1994), Favero, Giavazzi, Flabbi (1999), de Bondt (2000), Kakes and Sturm (2000) - improve the identification of the lending channel by using desegregated bank balance sheet data. Hallsten(1999) and Italiano(2001) use interest rate spreads (e.g. the spread between banking sector lending rate and the overnight interest rate).

  4. The hypothesis of this paper:The Romanian bank loan is supply determined (a bank lending channel is at work) • The econometric evidence (sample 1995:01 2003:01): • a preliminary regression and VAR analysis • estimating a set of disequilibrium models The mainfinding: The Romanian loan market is supply driven, being characterised by a state of disequilibrium throughout the sample period.

  5. Descriptive analysis of the Romanian loan market • slow structural reforms, weak confidence in the national currency and in the domestic banking lead to a process of acute process of demonetisation and disintermedition

  6. an important substitution effect has occurred the Romanian banking system is overwhelmingly oriented towards short term credit

  7. Description of variables

  8. Unit root tests

  9. Preliminary regression and VAR analysisA. Regression analysis (cragr as dependent variable)

  10. B. VAR analysis( variables: cragr, M0r, r_nbr, ipsa lag order: 3 sample:1995:01 2003:01) • B.1 Impulse response functions and Granger causality tests • responses to a monetary innovation

  11. Response of industrial production to a bank loan innovation • response of credit to an interest rate innovation

  12. A simple regime switching model-disequilibrium model (Maddala Nelson (1974))

  13. Considering the simplifying assumption we will get the following likelihood function:

  14. Initial conditions 1.with i=1,2 2. 3. for for

  15. Results of the Monte Carlo experiment on starting values(10,000 simulations)

  16. Results on Monte Carlo experiment on ML estimates (10,000 simulations)

  17. Model 1- a parsimonious specification

  18. Model 2-final specification

  19. Probabilities of Demand/Supply regime where

  20. Model 3-considering interest rate endogeneity

  21. Conclusions • Romanian bank lending was mainly supply driven throughout our sample • however, the bank lending channel of monetary policy is not complete due to the bank loan neutrality over output • the sporadic demand regime periods (spanning from 1997 until 1999 ) were due to a demand decline in the context of harsh economic conditions • from the year 2001 onwards the process of remonetisation was quite vigorous, re-establishing loan market equilibrium

  22. References Bernanke B S. - Gertler M. (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission”, NBER Working Paper No. 5146, June 1995 Bernanke B.S., Blinder A. (1988a), “Credit, Money, and Aggregate Demand”, NBER Working Paper, No. .2534 (1988b), “Credit, Money, and Aggregate Demand”, American Economic Review Papers and Proceedings, Vol. 78, No .2, March (1992), “The Federal Funds rate and the Channels of Monetary Transmission”, American Economic Review, September, pp. 901-921. Bernanke B S., Gertler M, Gilchrist S (1998) “The financial accelerator in a quantitative business cycle framework” NBR Working Paper No 6455 March de Bondt G., (1999) “Credit Channels and Consumption in Europe:Empirical Evidence” BIS Working Series No 69 June Enders, W., “ Applied econometric time series”, John Wiley and Sons 1995 Favero C., Giavazzi F., Flabbi L. (1999),”The Transmission Mechanism of Monetary Policy in Europe: Evidence from banks balance sheets” NBER Working Paper 7231 July 1999

  23. Garretsen H. Swank J. (2000)”The Bank Lending Channel in the Netherlands: The Impact of Monetary Policy on Households and Firms” Dept. of Applied Economics, University of Nijmegen Hallsten K. (1999) “Bank Loans and the Transmission Mechanism of Monetary Policy ” Department of Economics Stockholm University Sveriges Riksbank Working Paper No. 73. Hamilton J. (1994). “Time Series Analysis” Princeton University Press Hulsewig O., Winkler P., Worms A.,(2001) “Bank lending in monetary transmission mechanism: A VECM Analysis for Germany” International University in Germany Working Paper 08/2001 Hurlin C., Kierzenkowski R. (2001), “The Bank Lending Channel: a Critical Assessment of Theoretical Foundations” Working Paper, Paris IX Dauphine University. Italiano, J. “An Empirical Search for a Canadian Credit Channel” Canadian Department of Finance Working Paper 2001-15 Kashyap, A.N., J.C. Stein, and D.W. Wilcox (1993), “Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance”, American Economic Review, 83, no. 1, March, pp.78-98. Kashiap A., Stein J. (1994), “Monetary Policy and Bank Lending”, in Mankiw G (ed.), Monetary Policy, Chicago University Press Konishi T., V. A. Ramey, C. Granger (1993), “Stochastic trends and short run relationships between financial variables and real activity” NBER Working Paper No 4275 February

  24. Maddala G.S., Nelson F.D. (1974), “Maximum Likelihood Methods for Models of Markets in Disequilibrium”, Econometrica, Vo l . 4 2 , N .6, November, pp. 1013-1030. Oliner, S.D.,. Rudebush G.D (1995), “Is there a Bank lending Channel for Monetary Policy?”, FRB San Francisco Economic Review, No.2, pp.3-20. Ramey V. (1993), “How Important is the Credit Channel in the Transmission of Monetary Policy?”, Carnegie-Rochester Conference series on Pubic Policy, 39, December, pp. 1-45. Romer C., Romer D. (1993), “Credit Channel or Credit Action? An Interpretation of Postwar Transmission Mechanism”, NBER Working Paper No. 4485. Sealey C.W. (1979), “Credit Rationing in the Commercial Loan Market: Estimates of a Structural Model under Conditions of Disequilibrium”, The Journal of Finance,Vol.34,No .3, June, pp. 689-702. Stiglitz, J. E., and A. Weiss (1981), Credit Rationing in Markets with Imperfect Information, American Economic Review, 71, 393-410. Walsh, C. E., “Monetary Theory and Policy”, MIT Press 1998, Ch. 7 Watson M. W. (1994), “Vector Autoregression and Cointegration”, in Hand-book of econometrics *** National Bank of Romania : Annual Reports, Monthly Bulletins *** IMF Country Reports 03/123 May 2003, 03/12 Jan. 2003, 03/11 Jan. 2003, 02/254 Nov. 2002

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