The Bank Lending Channel of Monetary Transmission in Brazil

This paper tests for the existence of a bank lending channel in the transmission of monetary policy inBrazil using monthly aggregate data for the period 1995:12 through 2008:6. The test is carried out in aVECM setting that allows for multiple cointegrating relationships among the variables of interest. We findevidence of two cointegrating vectors, which we identify as bank loan demand and supply functions bytesting for a number of exclusion and exogeneity restrictions on the cointegrating relationships. Loansupply is negatively related to the interbank deposit certificate rate in the long term, which confirms theexistence of a lending channel for monetary transmission. The VECM’s short-term dynamics show thatloan demand is equilibrium-correcting. But short-term disequilibria in the supply of loans are correctedthrough changes in the interbank deposit certificate rate, suggesting that monetary policy plays a role inrestoring equilibrium in the credit market by affecting the borrowing rate faced by banks to raisenon-deposit funds. This Working Paper relates to the 2009 OECD Economic Survey of Brazil(www.oecd.org/eco/surveys/brazil)