Re-examining the Transmission of Monetary Policy: What More Do a Million Observations Have to Say

In this paper we re–examine banks’ lending behavior taking into account changes in the stance of monetary policy in conjunction with changes in financial sector uncertainty. Using a very large data set covering all banks in the US between 1979–2000, we show that financial sector uncertainty plays an important role in banks’ lending decisions: for a given size classification, less liquid banks (and generally smaller banks) lend proportionally more than stronger counterparts in times of higher uncertainty. More importantly, we provide conclusive evidence that the bank lending channel is either nonexistent or at best not very important for the U.S. JEL: E44, E52, G32.