Banks' Financial Conditions and the Transmission of Monetary Policy: A FAVAR Approach
by Ramona Jimborean and Jean-Stéphane Mésonnier
Banque de France
We propose a novel approach to assess whether banks’
financial conditions, as reflected by bank-level information,
matter for the transmission of monetary policy, while reconciling
the micro and macro levels of analysis. We include factors
summarizing large sets of individual bank balance sheet
ratios in a standard factor-augmented vector autoregression
model (FAVAR) of the French economy. We first find that factors
extracted from banks’ liquidity and leverage ratios predict
macroeconomic fluctuations. This suggests a potential scope
for macroprudential policies aimed at dampening the procyclical
effects of adjustments in banks’ balance sheet structures.
However, we also find that fluctuations in bank ratio factors
are largely irrelevant for the transmission of monetary
shocks. Thus, there is little point in monitoring the information contained in bank balance sheets, above the information
already contained in credit aggregates, as far as monetary
policy transmission is concerned.
JEL Codes: E44, E52, G21.
(PDF, 47 pages 648 kb)
Discussion by Donald P. Morgan