Introduction

This chapter investigates the existence of the bank-lending channel in the transmission of monetary policy using Portuguese micro bank data. In contrast to the conventional approach, which addresses the identification issue by resorting to reduced form equations for bank credit with variables in differences, we directly estimate loan-supply schedules with variables in levels, thereby exploiting recent results on cointegration for panel data.

The main conclusion is that there is a banking lending channel in the transmission of monetary policy in the Portuguese economy and that the importance of this channel is larger for the less capitalised banks. Size and liquidity do not appear to be relevant bank characteristics in determining the importance of the lending channel.

The remainder of the chapter is organised as follows. Section 2 briefly characterises the main changes undergone by the Portuguese banking sector during the 1980s and 1990s. Section 3 describes the new approach aimed at identifying and estimating the importance of the bank-lending channel. Section 4 reports the empirical results for Portugal and section 5 summarises the main conclusions.

Monetary policy and banking sector developments in Portugal during the 1990s

Since the early 1980s the Portuguese financial system underwent a fundamental liberalisation process beginning with the opening up of the banking sector to private initiative in 1983. In this period the first steps towards the elimination of the administrative controls on interest rates and credit growth were also taken.