Revisiting interest rate and lending channels of monetary policy transmission in the light of theoretical prescriptions

Özet

Although theories on channels of monetary policy transmission emphasize indirect monetary policyeffect on inflation and output, empirical literature is surprisingly rooted in a direct approach. The use ofvariants of vector autoregression, with theoretical ordering of variables, does not only fail to quantify theindirect effect, but are also fraught with disagreements on identification of shocks of monetary policy.We revisit the interest rate and lending channels of monetary policy transmission in an approach that isgrounded in theory and elicits step-by-step transmission of monetary policy impulses and the eventualeffect on inflation in South Africa. We find interest rate and lending channels to be operative in SouthAfrica. For the interest rate channel, a percentage restriction in monetary policy increases lending rate by0.29%; a percentage increase in the lending rate reduces investment by 0.063%; and a percentage fall ininvestment reduces inflation by 0.074%. For the lending channel, a percentage restriction of monetarypolicy reduces banking sector credit by 0.22%; a percentage fall in private sector credit reduces investment by 0.20%; and a percentage decline in investment reduces inflation by 0.086%. These results arerobust to different samples and specifications.