The transmission mechanism of monetary policy and the bank lending channel : the case of Greece

• Main Author: Markidou, Aikaterini
• Published: University of Sheffield 2010
• Subjects: 330.9495
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.554220

Credit developments carry significant information about both economic and financial activity. First of all, changes in credit provide signals about the availability at and demand for funds supporting (or deterring) investment and spending decisions by the private non-financial sector. This is particularly the case with respect to Greece where bank lending is one of the major sources of financing for firms and households. In addition, up to the present, the Greek banking sector has been scarcely studied due to data limitations. This thesis analyzes the relevance of a bank lending channel (BLC) operating in the monetary transmission process in Greece for the period 1980-2008 by means of two different conceptually methodologies and investigates the credit view of monetary policy. A SV AR approach with a macro-dynamic system attempts to examine the interaction between bank credit and key macroeconomic variables. The outcomes are not in favour of the existence of the BLC in Greece when monetary base is considered as the main monetary policy variable. On the other hand, when interest rate is used to capture the role of monetary policy variable, there is weak evidence that BLC might be present and bank credit to households seems to be more vulnerable compared to bank credit to corporations. The second approach estimates a model within the VECM framework, and which allows disentangling of loan supply and loan demand side effects of monetary policy moves. By using the Johansen approach, two cointegrating vectors are detected, which are tentatively identified as a long-run loan demand equation, and a long-run loan supply equation, respectively. Nevertheless, the upshots of the short-run dynamics cannot firmly indicate whether interest rate spread is a critical determinant of loan supply in Greece. Moreover, the credit market assumed to be demand driven where only demand side effects contribute substantially to the impact of monetary policy actions, implying the nonexistence of the BLC for the case of Greece.