Liquidity Shocks and The Bank Lending Channel: Evidence from Lower-Middle Income Economies

Abstract

This paper examines the impacts of central banks’ liquidity injections on commercial banks’ credit supply in thirty-two lower-middle income economies over the period 1990 until 2020. We use a SVAR panel model to analyze the dynamic interactions between the central bank balance sheet policy, bank liquidity, and bank lending. The results show that liquidity injections have a non-significant impact on the credit to the private sector and a persistent positive impact on banks’ liquid reserves. These results confirm the inefficiency of the bank lending channel in transmitting the central bank balance sheet monetary policy to the real economy in the considered LMIC’s.