The Asymmetric Effects of Monetary Policy and Bank Credits in Taiwan Banking Industry – A Dynamic Panel Data Analysis

Abstract

This paper investigates whether distributional effect arising from the impact of monetary policy on bank credits will be different when monetary policy is asymmetric. Methodologically, we use a set of high frequency panel data for Taiwan commercial banks and adopt Arellano and Bond’s (1991) generalized method of moments approach to conduct our empirical analysis. First of all, we investigate whether there_x000D_ exist the distributional effects of monetary policy on bank lending behavior which is_x000D_ associated with bank balance sheet characteristics, such as asset size and liquidity_x000D_ strength. In other words, we can show the existence of bank lending channel. Secondly,_x000D_ we examine the differentials of bank credits in response to a contractionary policy and_x000D_ expansionary policy. We then can prove monetary policy is asymmetric. Lastly, we consider the link between the monetary policy asymmetry and the distributional effect of bank credits. Our empirical results find that the bank lending channel of monetary transmission is operative in Taiwan and that the degree of the asymmetric policy effect depends on the bank balance sheet characteristics. This study not merely contributes to understanding the monetary transmission mechanism in Taiwan, but also provides the reference for policy-making.