The Multi-Regime Bank Lending Channel and the Effectiveness of the Polish Monetary Policy Transmission During Transition

This Paper examines the consequences of interactions between the bank lending channel and the traditional interest rate and exchange rate channels on the effectiveness of the monetary policy transmission in Poland since 1994. First, we develop a small open-economy credit-augmented model. Under two different exchange rate arrangements, namely a fixed rate system with sterilized intervention and a pure floating rate system, we establish that the bank lending channel can generate several regimes in the transmission of monetary policy shocks. In essence, it may not only amplify, as usually considered in the literature, but it may also attenuate the impact of monetary policy on output, prices and the real exchange rate as compared to the standard effects of both the interest rate and the exchange rate channels. The variations in the interest rate spread between the loan rate and the central bank's intervention rate are found to be a good indicator of amplification and attenuation regimes, provided that there is a positive relationship between both rates. Second, we find an attenuation bank lending channel regime from the beginning of 1996 to the end of 1998, and on average a neutral effect of the bank lending channel since then.