Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/115128 
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 1411
Publisher: 
Johannes Kepler University of Linz, Department of Economics, Linz
Abstract: 
This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
Subjects: 
Bank lending standards
Credit supply
Monetary policy
Risk channel
JEL: 
E44
E52
Document Type: 
Working Paper

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