Bank Lending and Monetary Policy Transmission in Austria

This paper examines the role of banks in the propagation process of monetary policy actions. Testable hypotheses are deduced from the theory of the lending channel, which argues that after a policy-induced drain of funds from the banking sector, some (types of) institutions are unable or unwilling to retain their prior levels of lending. To identify the decisive bank attributes, disaggregated data for the full population of Austrian banks is used for the 1998-2005 period. The average Austrian bank is found to significantly reduce its growth rate of loans after an increase in policy-driven interest rates. Heterogeneous lending reactions appear to be more pronounced for the institutions that are organized in multi-tier sectors. At large, the results are not compatible with the widespread notion that the Austrian banking sector absorbs monetary shocks. The lending channel also seems of aggregate importance as impulses in loan supply are found to significantly affect the growth rate of real GDP.