Examining the Monetary Policy Transmission in Jordan: The Bank-Lending Channel

Abstract

This study examines the relevance of banking lending channel in Jordan using OLS, fixed effect model and random effect over the period 2001-2012. The growth in bank loans of all the sixteen local banks operating in Jordan is regressed on the current and lagged values of changes in the short-term money market rate, bank securities holdings, deposits, GDP and the lagged value of change in bank lending. Furthermore, the interaction of bank features including size, liquidity, capitalization and loan-loss provision with monetary policy stance on the loan supply is evaluated to control for potential bias of endogeneity that result from including the lagged values of explanatory variables. Our results unexpectedly show that the bank lending responds positively to changes in the contemporaneous stance of monetary policy. In other words, the increase in the short-term interest rate motivates the banks to increase their loans holdings. This behavior has been reinforced by the synchronized regulatory pressure on banks to increase their equity capital holding over the study period. Thus, the administrators of the banks and the monetary authority in Jordan should watch the concomitant consequences of the monetary policy transmission and monitor the micro-dynamics of individual banks as the excessive expansion in loan supply may exposes the banks to higher levels of operating risks and other forms of risk. JEL Classification: C33, E5, E31, E58, P24, G21, E52, O16, O23.