The Bank Lending Channel: A FAVAR Analysis

We examine the bank lending channel (BLC) of monetary transmission in a factor-augmented vector autoregression (FAVAR). A FAVAR exploits large numbers of macro-economic indicators and allows us to consider an alternative identification of monetary shocks and analyze the lending response of banks at the aggregate and individual levels. We find that the existence of the BLC is more prevalent than previously thought using aggregated lending data, while the lending response of individual banks are driven more by specific innovations than monetary shocks. Nonetheless, the average individual bank response to a monetary shock is consistent with the existence of a BLC.