New Evidence on the Lending Channel

The response of aggregate lending to monetary policy is stronger in state banking markets where financially constrained banks have more market share. On the other hand, there is little difference in the response of state output across the market share financially constrained banks, implying that the aggregate elasticity of output to bank lending is very small, if not zero. I conclude that while small firms might view bank loans as special, they are not special enough for the lending channel to be an important part of how monetary policy works.