This study examines whether the bank lending channel holds for Malaysia based on a simultaneous-equation model consisting of the demand for and supply of bank loans. The three-stage least squares method to employed to estimate regression parameters. There is evidence of the bank lending channel for Malaysia because bank loan supply reacts negatively to the interbank rate and because monetary easing to purchase government bonds leads to more bank deposits and bank loan supply. In addition, depreciation of the Malaysian ringgit or a higher world interest rate results in a decrease in bank loan supply.
Contribution/ Originality
This paper’s primary contribution is to include the exchange rate and the foreign interest rate in bank loan supply, to employ a three-stage least squares method to estimate bank loan demand and supply separately, and to prove the effectiveness of monetary policy transmission.
Keywords:
Reference:
Abdul Karim, Z., W.N.W. Azman-Saini and B. Abdul Karim, 2011. Bank lending channel of monetary policy: Dynamic panel data study of Malaysia. Journal of Asia-Pacific Business, 12(3): 225-243.
Bernanke, B.S. and A.S. Blinder, 1988. Credit, money, and aggregate demand. American Economic Review, 78(2): 435-439.
Bernanke, B.S. and A.S. Blinder, 1992. The federal funds rate and the channels of monetary. Transmission. American Economic Review, 82(4): 901-921.
Bernanke, B.S. and M. Gertler, 1995. Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4): 27-48.
Gertler, M. and S. Gilchrist, 1994. Monetary policy, business cycles, and the behavior of small manufacturing firms. Quarterly Journal of Economics, 109(2): 309-340.
Ibrahim, M.H. and M.E. Shah, 2012. Bank lending, macroeconomic conditions and financial uncertainty: Evidence from Malaysia. Review of Development Finance, 2(3): 156-164.
Kashyap, A.K. and J.C. Stein, 1995. The impact of monetary policy on bank balance sheet. Carnegie-Rochester Conference Series on Public Policy, 42(June): 151-195.
Kashyap, A.K. and J.C. Stein, 2000. What do a million observations on banks say about the transmission of monetary policy? American Economic Review, 90(3): 407-448.
Kashyap, A.K., J.C. Stein and D.W. Wilcox, 1993. Monetary policy and credit conditions: Evidence from the composition of external finance. American Economic Review, 83(1): 78-99.
Kishan, R.P. and T.P. Opiela, 2000. Bank size, bank capital, and the bank lending channel. Journal of Money, Credit and Banking, 32(1): 121-141.
Morris, C.S. and G.H. Sellon, 1995. Bank lending and monetary policy: Evidence on a credit channel. Federal Reserve Bank of Kansas City Economic Review, 80(2): 59-75.
Oliner, S.D. and G.D. Rudebusch, 1995. Is there a bank lending channel for monetary policy? Economic Review, 2(Spring): 3-20.
Olivero, M.P., Y. Li and B.N. Jeon, 2011. Competition in banking and the lending channel: Evidence from bank-level data in Asia and Latin America. Journal of Banking & Finance, 35(3): 571.
Peek, J. and E.S. Rosengren, 1995. Is bank lending important for the transmission of monetary policy? An overview. Federal Reserve Bank of Boston New England Economic Review, November: 3-11.
Peersman, G., 2004. The transmission of monetary policy in the Euro area: Are the effects different across countries? Oxford Bulletin of Economics and Statistics, 66(3): 285-308.
Ramsey, V.A., 1993. How important is the credit channel in the transmission of monetary policy? NBER Working Paper No. 4285, National Bureau of Economic Research, Inc.
Romer, C.D. and D.H. Romer, 1989. Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. NBER Macroeconomic Annual, 1989(4): 121-184.
Sims, C.A., 1992. Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review, 36(21): 975-1000.
Sukmana, R. and S.H. Kassim, 2010. Roles of the Islamic banks in the monetary transmission process in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 3(1): 7-19.
Suzuki, T., 2004. Credit channel of monetary policy in Japan: Resolving the supply versus demand puzzle. Applied Economics, 36(21): 2385-2396.
Vera, D., 2012. How responsive are banks to monetary policy? Applied Economics, 44(18): 2335-2346.
Wulandari, R., 2012. Do credit channel and interest rate channel play important role in monetary transmission mechanism in Indonesia?: A structural vector autoregression model. Procedia-Social and Behavioral Sciences, 65(4): 557-563.
Zanforlin, L., 2011. Domestic lending when financial markets are integrated: Is it all for real? Applied Economics Letters, 18(16): 1517-1520.
Zulkhibri, M., 2013. Bank-characteristics, lending channel and monetary policy in emerging markets: Bank-level evidence from Malaysia. Applied Financial Economics, 23(5): 347-362.