Monetary policy shock and impact asymmetry in bank lending channel: Evidence from the UK housing sector

Rosen Azad Chowdhury, Dilshad Jahan, Tapas Mishra, Mamata Parhi

Research output: Contribution to journalArticlepeer-review

7 Downloads (Pure)

Abstract

AbstractBanks play a defining role in translating monetary policy shocks to pull or push‐effects in the housing market. The literature is ambiguous on the exact role of bank lending channel (BLC) in translating such effects into either moderation or acceleration of dynamics in the housing market. This paper argues that monetary policy shocks, of the same magnitude, can have asymmetric implications for a housing market via a state dependent BLC, particularly during expansion and recessionary phases of the business cycle. We test this hypothesis for the UK housing sector using a long quarterly data (1973Q1‐2015Q4) and employing Markov Switching Vector Auto Regression (MSVAR) models. Our results show that the magnitude of the bank lending channel is contingent upon the state of the economy, with a one standard deviation expansionary monetary policy shock producing a significant effect only in normal economic times. Further study on whether large cuts in policy rates could stimulate mortgage lending and whether there is impact asymmetry to dissimilar expansionary monetary policy shocks during financial crisis, we show that a sharp cut in policy rate indeed stimulates the BLC greater compared to smaller expansionary money policy shocks during recessions.
Original languageEnglish
Pages (from-to)511-530
Number of pages20
JournalInternational Journal of Finance & Economics
Volume29
Issue number1
DOIs
Publication statusPublished - 7 Sept 2022

Keywords

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this