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Most Downloaded Articles
- Comparing Wealth Effects: The Stock Market versus the Housing Market by Case, Karl E./ Quigley, John M. and Shiller, Robert J.
- Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium by Heylen, Freddy and Van de Kerckhove, Renaat
- The Effects of the Great Recession on Central Bank Doctrine and Practice by Bernanke, Ben S.
- Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States by Zhou, Xia and Carroll, Christopher D.
Banking Conditions and the Effects of Monetary Policy: Evidence from U.S. States
1Federal Reserve Board, (email)
Citation Information: The B.E. Journal of Macroeconomics. Volume 12, Issue 2, ISSN (Online) 1935-1690, DOI: 10.1515/1935-1690.2411, March 2012
- Published Online:
Using data from U.S. states, this paper examines empirically how the effects of monetary policy on output depend on banking conditions. I find that when a state’s banking sector starts out with a low capital-asset ratio, its subsequent lending and output growth are both more sensitive to changes in the federal funds rate or other indicators of monetary policy. This result is consistent with the existence of a ‘bank capital channel’ as well as a conventional bank lending channel. Other evidence favors the capital channel, as bank liquidity is not associated with variation in the impact of monetary policy on output at the state level. Consistent with the theory, the importance of state-level measures of bank capital weakens significantly after the removal of regulatory barriers to interstate banking.