Identifying bank lending reaction to monetary policy through data frequency

Joao M. De Mello, PUC-Rio
Marcio Garcia, PUC-RIo
Christiano Arrigoni, Banco Central do Brasil

Abstract

Using the daily frequencies of interest rates and new loans in our data as a source of identification, we estimate banks’ reactions to monetary policy committee decisions. We argue that these estimated reduced-form coefficients can be interpreted as supply shifts. The behavior of the estimates corroborates the claim that we capture supply movements because new loans (interest rate) react negatively (positively) to expected changes in the basic interest rate and reserve requirements changes. Contrary to the empirical literature we find strong evidence that larger banks react more to monetary policy shocks. Estimates are robust to an extensive sensitivity analysis.