Is There a Bank Lending Channel in Southern African Banking Systems?

Abstract

Abstract: Macroeconomic models currently used by policymakers generally assume that the functioning of financial markets can be fully summarized by financial prices, because the Modigliani and Miller (1958) theorem holds. However, the assumption that this theorem holds is questionable. This paper argues that there are frictions in the market which traditional models based on the Modigliani and Miller theorem fail to take into account in explaining how monetary policy and other shocks are transmitted to the economy and points to new directions. A comprehensive macroeconomic model should incorporate financial market interactions to enhance the understanding of the transmission mechanisms of monetary policy and other shocks. If market dynamics are not taken into account, macroeconomic models used by policymakers may point to wrong policy choices. Motivated by the lack of assessment of the recently launched financial reforms, deregulation, consolidations, financial innovations and joint payment systems, the paper assesses the process of monetary transmission mechanism by investigating evidence of a bank lending channel in SADC during the period 1990–2006 using data from the banking sector. Data from a panel of banks is used to identify shifts in the loan supply curve in response to changes in monetary policy using a vector autoregression (VAR) model. Although the results are mixed the paper generally reports the existence of a bank‐lending channel in all SADC countries in the sample. The take‐off point for monetary policy effects differs from one country to another.

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