Introduction

In this chapter we show evidence that bears on the existence of the credit channel of monetary policy in Finland. We estimate reduced form dynamic equations for bank loans that were initially proposed by Kashyap and Stein (1995), using a panel of Finnish banks. A more detailed analysis of the issues can be found in Topi and Vilmunen (2001).

A number of studies have addressed the relationship between financial structure and economic performance in Finland (Brunila, 1994; Honkapohja and Koskela, 1999; Kajanoja, 1995; Kinnunen and Vihriälä 1999; Mörttinen 2000; Saarenheimo, 1995; Vihriälä, 1997; Vilmunen 2002). However, none of these focuses specifically on identifying the effects of monetary policy on bank-lending supply. Our contribution is to test the existence of the bank-lending channel in Finland. More precisely, we estimate the response of individual bank loans to monetary policy shocks and we use the cross-sectional differences between banks to test whether this response depends significantly on the size, liquidity and capitalisation of banks.

The rest of the chapter is structured as follows. Section 2 gives a brief account of the economic development prior to the onset of the banking crisis in early 1990s and reviews the post-crisis – in-sample – evolution of the Finnish banking sector. It also presents the data and informs the reader about estimation method used in the empirical analysis. Section 3 presents the estimation results and section 4 draws some conclusions. Tables summarising the data as well as the estimation results are relegated to an appendix.