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Business Loans and the Transmission of Monetary Policy

Published online by Cambridge University Press:  14 September 2018

Santiago Barraza ,
Andrea Civelli  and
Nicola Zaniboni
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Abstract

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to the contractual characteristics and the borrower–lender types of loans. We show that the puzzling increase in business loans in response to monetary tightening, documented before the Great Recession, is largely driven by drawdowns from existing commitments at large banks. Spot loans also rise and take a considerable amount of time to adjust. Banks, nonetheless, do curtail credit supply by shortening maturities of new loans. Following the Great Recession, the mechanism has worked differently, with loan responses to monetary tightening displaying a significant downward shift.

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Type
Research Article
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Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 925 - 965
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

[The views expressed here are those of the author and not necessarily those of Guggenheim Partners or its subsidiaries]. We thank Jarrad Harford (the editor). We thank especially John Duca (the referee) for insightful suggestions that significantly contributed to this work. We also thank Allen Berger, Francesco Bianchi, Lamont Black, Steve Dennis, Wayne Lee, Alexey Malakhov, Bradley Paye, Fabiana Penas, Horacio Sapriza, Gustavo Suárez, Tim Yeager, seminar participants at Universidad de San Andrés and University of Arkansas, and conference participants at the 2017 Financial Management Association European Conference and the 2017 Latin American and Caribbean Economic Association Meeting (LACEA)–Latin American Meeting of the Econometric Society (LAMES) Conference for helpful comments and suggestions. This research was supported with a grant from the Bank of America Research Fund Honoring James H. Penick. We are also indebted to Thomas Allard, Sam Haltenhof, Thomas Spiller, and, particularly, William English, for helping us obtain the Survey of Terms of Business Lending (STBL) data from the Board of Governors of the Federal Reserve System. Any errors or omissions are our own.

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