The bank lending channel and monetary transmission in Central and Eastern European countries

This paper carries out a systematic empirical investigation of the bank lending channel of monetary transmission in the 8 CEE countries which have joined the EU: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. We examine in particular whether the impact of monetary policy changes on bank lending differs depending on the banks' size, capital strength, liquidity and ownership structure. Panel data for a large number of banks over the period 1994–2003, and dynamic panel estimation techniques are employed. Looking at the experience of individual countries, there is evidence of a bank lending channel in all countries, though the strength of it varies across countries. Bank size and liquidity seem to play the most significant role in distinguishing banks' reactions to changes in monetary policy. We also investigate the macroeconomic consequences of the bank lending channel and find evidence connecting aggregate loan supply to real economic activity in the CEE countries.