Monetary Policy, Bank Capital, and Credit Supply: A Role for Discouraged and Informally Rejected Firms
by Alexander Popov
European Central Bank
This paper conducts the first empirical study of the bank balance sheet channel using data on discouraged and informally rejected firms, in addition to information on the formal
loan-granting process, in eight economies that use the euro or are pegged to it over 2004–7. Consistent with previous studies, I find that lax monetary conditions increase bank credit
in general and bank credit to ex ante risky firms in particular, especially for banks with lower capital ratios. Importantly, I find that the results are considerably stronger when data on
informal credit constraints are incorporated.
JEL Codes: E32, E51, E52, F34, G21.
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