On the firm-level implications of the Bank Lending Channel of monetary policy

Standard models of the Bank Lending Channel are unable to yield predictions on the differential impact of monetary policy shocks over heterogeneous borrowers. This inability has made researchers doubt about the role played by bank credit as a transmission mechanism of monetary policy. Moreover, it has made them reject those models in favor of the Balance Sheet Channel as a transmission mechanism. In this paper we show that an “augmented” version of the Bank Lending Channel that allows for firm heterogeneity (but without any role for firms' balance sheets) reproduces well the dynamics of firm-level data. Our contribution is to show that it is not clear that the Bank Lending Channel should be rejected in favor of alternative theories on the basis of its inability to reproduce firm-level data. Thus, there is additional room for econometric tests that can provide support to the Bank Lending Channel.