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Monetary policy shock and impact asymmetry in bank lending channel: Evidence from the UK housing sector
International Journal of Finance and Economics
Swansea University Authors: Rosen Chowdhury , Dilshad Jahan
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DOI (Published version): 10.1002/ijfe.2696
Banks play a defining role in translating monetary policy shocks to pull or push-effects in the housing market. The literature is ambiguous on the exact role of bank lending channel (BLC) in translating such effects into either moderation or acceleration of dynamics in the housing market. This paper...
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Banks play a defining role in translating monetary policy shocks to pull or push-effects in the housing market. The literature is ambiguous on the exact role of bank lending channel (BLC) in translating such effects into either moderation or acceleration of dynamics in the housing market. This paper argues that monetary policy shocks, of the same magnitude, can have asymmetric implications for a housing market via a state dependent BLC, particularly during expansion and recessionary phases of the business cycle. We test this hypothesis for the UK housing sector using a long quarterly data (1973Q1-2015Q4) and employing Markov Switching Vector Auto Regression (MSVAR) models. Our results show that the magnitude of the bank lending channel is contingent upon the state of the economy, with a one standard deviation expansionary monetary policy shock producing a significant effect only in normal economic times. Further study on whether large cuts in policy rates could stimulate mortgage lending and whether there is impact asymmetry to dissimilar expansionary monetary policy shocks during financial crisis, we show that a sharp cut in policy rate indeed stimulates the BLC greater compared to smaller expansionary money policy shocks during recessions.
bank lending channel, Markov, monetary transmission, real estate economics,switching VAR
Faculty of Humanities and Social Sciences