Journal of Applied Finance & Banking

Bank Lending Channel of the Monetary Policy Transmission Mechanism in Uganda: Evidence from Disaggregated Bank-level Data

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• Abstract

  This paper examines the relevance of the bank lending channel of the monetary policy transmission mechanism in Uganda using micro-level data. In addition, the impact of individual bank characteristics of size, liquidity, and capitalization on the banks’ loan supply function are also investigated. This is estimated in a dynamic panel data framework based on a generalized method of moment (GMM) dynamic panel estimator of Arellano and Bond, 1991, Arellano and Bover, 1995 and recently extended by Blundell and Bond, 1998. This framework has an advantage that it helps control for potential biases induced by endogeneity which is inherent in our specification due to the inclusion of lagged dependent variables as regressors. The empirical results indicate the presence of the bank lending channel of the monetary policy transmission mechanism in Uganda. In addition, individual bank-characteristics of liquidity and capitalization also play a significant role in influencing the supply of bank loans. There is there need for the central bank to monitor the micro-dynamics of individual bank behaviour in order to enhance the efficacy of the lending channel of monetary policy transmission mechanism.