Bank lending channel of monetary policy: dynamic panel data evidence from Malaysia

This paper aims to investigate the relevance of bank-lending channel (BLC) of monetary policy in a small-open economy, i.e. Malaysia by using disaggregated bank-level data set. A dynamic panel data method namely GMM framework proposed by Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond (1998) have been used in estimating the dynamic of banks’ loan supply function. The empirical evidence has stated that monetary policy shocks is significantly and negatively influenced the banks’ loan supply, and therefore has supported the existence of BLC in Malaysia. In addition, several bank-characteristics variables namely bank liquidity and bank capitalization (capital adequacy ratio) are also statistically significant in influencing the banks’ loan supply. Therefore, the implementation of monetary policy is effective in influencing economic activity via bank balance sheet position, in particular bank loans