Examining the Impact of Monetary Policy Through the Bank Lending Channel and Balance Sheet Channel on the Commercial Banking System
Keywords:
Monetary policy, bank lending channel, balance sheet channel, commercial banks, off-balance sheet items, BVAR modelAbstract
Objective: This study aims to investigate the impact of monetary policy through the bank lending channel and the balance sheet channel on the commercial banking system in Iran between 2016 and 2022. Methodology: The research uses quarterly panel data from six major Iranian commercial banks (Mellat, Tejarat, Sepah, Refah, Melli, and Saderat) during the period 2016:Q1 to 2022:Q4. A Bayesian Vector Autoregression (BVAR) model, panel data techniques, and cointegration tests (Kao, Pedroni, Westerlund) were employed. Key variables included base money growth, government expenditure, output gap, consumer price index, and real exchange rate. Findings: Causality tests and impulse response functions revealed that government spending, output gap, CPI, and real exchange rate significantly influence base money growth. A long-term equilibrium relationship was confirmed, with a statistically significant negative error correction coefficient (−0.12), indicating a steady return to equilibrium following shocks. The model showed strong explanatory power (R² = 0.88), validating the robustness of the BVAR framework in capturing short- and long-run dynamics. Conclusion: Monetary transmission through lending and balance sheet channels plays a pivotal role in shaping macroeconomic outcomes. The presence of off-balance sheet items complicates the transmission mechanism by introducing liquidity outside the central bank’s control. Differentiated impacts of on- and off-balance sheet credit underscore the need for precise regulatory oversight and targeted monetary strategies to enhance effectiveness and economic stability.
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