Business Loans and the Transmission of Monetary Policy

Santiago Barraza, Andrea Civelli, and Nicola Zaniboni

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to loans’ contractual characteristics and borrower-lender types. We show that the puzzling increase in business loans in response to monetary tightening, documented before the Great Recession, is largely driven by drawdowns from existing commitments at large banks. Spot loans also rise and take considerable time to adjust. Banks, nonetheless, do curtail credit supply by shortening maturities of new loans. Following the Great Recession, the mechanism has worked differently, with loan responses to monetary tightening displaying a significant downward shift.