A Theoretical and Empirical Assessment of the Bank Lending Channel and Loan Market Disequilibrium in Poland

We study the impact of the bank lending channel and loan market disequilibrium on the efficiency of the monetary policy transmission in Poland since 1994. First, we develop a simple credit-augmented model with an interest rate control, flexible prices and an imperfect nominal wage indexation. Within this framework, we establish that the bank lending channel may amplify but also attenuate the impact of monetary policy shocks on output and prices as compared to the traditional interest rate channel. The variations in the interest rate spread between the loan rate and the central bank’s intervention rate are a good indicator when distinguishing between amplification and attenuation effects of monetary policy shocks provided that there is a positive relationship between both rates and that the loan interest rate is a market clearing variable. Second, we apply a regime switching framework to the loan market. The results suggest that disequilibrium is a permanent characteristic of the Polish loan market since 1994. Moreover, we discuss empirically the impact of any type of disequilibrium in the loan market on the effectiveness of the bank lending channel. We find attenuation effects of the bank lending channel on monetary policy shocks from the beginning of 1996 to August 1998, and on average a neutral effect of this transmission channel from September 1998 to June 2001.