Banks’ role in Monetary Policy Transmission Mechanism (Emphasis on Balance-Sheet and Financial Health Characteristics of Banks )

Document Type : Research Paper

Authors

1 Professor of Economics University of Tabriz

2 PH.D. Student University of Tabriz

Abstract

   The bank lending channel is known as a credit channel in the literature of the monetary transmission mechanism. These channels are based on the assumption of asymmetric information and imperfect and inefficient markets. Since banks are important finance providers in Iran, the objective of this paper is to investigate the crucial role of the banks in the monetary transmission mechanism. To serve this purpose, the effect of the balance-sheet and financial health indicators of the banks together with their effect on the intensity of the monetary policy are investigated in the bank lending approach. Data and financial statements of eighteen state and private banks by using the GMM method and over 2007-2014 are studied. The results reveal that the effect of capital adequacy ratio is positive and significant during the considered period. Also the effect of deposit ratio is found to be negative and significant but very small. The macro economic variables such as GDP and Price index, both own positive and significant coefficients and credit risk and leverage ratio have negative and significant coefficients. Also it can be deducted from the findings that both capital adequacy and leverage ratio increase the intensity of the impact of the monetary policy on the loans. Therefore, in order to achieve the intended policy goals, it is highly recommended to the policy makers to take into account the indirect effects of the balance-sheet and financial health indicators of the banks especially the capital adequacy and the leverage ratio.
JEL Classification: E52, G21, E31, C22
 

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Main Subjects

References

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History

  • Receive Date: 29 April 2017
  • Revise Date: 11 October 2017
  • Accept Date: 19 September 2017

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