Introduction

This chapter tests cross-sectional differences in the effectiveness of the bank-lending channel of monetary policy transmission in Italy from 1986 to 1998. Several studies (including Angeloni et al., 1995; Bagliano and Favero, 1995; Buttiglione and Ferri, 1994; Chiades and Gambacorta, 2003; Fanelli and Paruolo, 1999) have shown that the bank-lending channel was at work in Italy. However, the cross-sectional predictions of the lending channel have not been systematically explored.

Panel data are used to study the response of bank deposits and loans to monetary shocks, and tests are proposed to see if these responses depend on the size, the liquidity position, or the capitalisation of banks. Such tests have not previously been conducted using comprehensive data on Italian banks. The main difference with respect to Ehrmann et al. (chapter 14 in this volume) lies in the additional tests that are conducted regarding deposits and liquidity: according to the bank-lending channel hypothesis, deposits and liquid assets, together with bank loans, should also fall after a monetary restriction. These tests therefore allow us to identify a loan-supply shock correctly.

The remainder of the chapter is organised as follows. Section 2 analyses the institutional characteristics of the Italian economy in the 1980s and 1990s. After a brief description of the data in section 3, section 4 presents evidence on the response of lending to a monetary shock, while section 5 analyses the effects on deposits and liquidity. Section 6 summarises the main conclusions.