Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?

Figure 1: The Discrepancy between the Theoretical and the Actual Multiplier

Two panels. The figure plots the theoretical and the actual multiplier from 1990 to 2008.

Panel 1: Implied simple multiplier and the theoretical simple multiplier are plotted as a bar chart. While the theoretical simple multiplier is constant around 10 after 1992 (and slightly smaller before that date), the implied simple multiplier fluctuates around the theoretical multiplier, reaching a minimum around 5 in 2002 and a maximum over 20 in 2003. The gap between the two multipliers is at a maximum in 2008 with the implied multiplier at a value less than 1.

Panel 2: Implied money multiplier and the theoretical money multiplier are plotted as a bar chart. While the theoretical money multiplier hovers around 3 over the sample period, the implied money multiplier fluctuates around the theoretical multiplier, reaching a minimum around -30 in 2000 and a maximum over 30 in 2007. The two multipliers are almost the same in 2008 at a value less than 1.

Figure 2: Monetary Aggregates and Bank Loans (1959-2007)

Two panels. The figure plots monetary aggregates and bank loans as a time series.

Panel 1: Required reserves, bank loans, and M2 are plotted as a curve. Required reserves increase steadily after 1959. They increase at an increasing rate after 1983, level off by 1992 and increase at an increasing rate again after that date, reaching its peak around 1995 ($60 billion) and declining afterwards. It hovers around $40 after 2001 with a peak about $45 around 2004. Bank loans and M2 increase steadily throughout the sample parallel to each other. Bank loans start around $2 billion in 1959 and end up over $6000 billion in 2007. M2 start saround $10 billion in 1959 and end up over $7500 billion in 2007.

Panel 2: Required reserves, total reserve balances, and M2 are plotted as a curve. Total reserve balances follow the general trend in required reserves. Their peak around 1995 is around $30 billion and it hovers around $15 after 2001 with a peak about $20 around 2004.

Figure 3: Bernanke and Blinder Updated (1990-2007)

Seven panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors.

Panel 1: Response of FFR to FFR. Data plotted as a curve. X axis displays the response and the standard errors of federal funds rate (FFR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of funds rate increases significantly and reaches its peak about 0.2 around month 6. It tapers off and becomes insignificant by month 12.

Panel 2: Response of LOG(CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(CPI) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of log CPI is overall positive, hovering around 0.0002 but never significant across the forecast horizon.

Panel 3: Response of LOG(LOANS/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/CPI) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(LOANS/CPI) increases significantly and reaches its peak about 0.002 around month 8. It tapers off and becomes insignificant by month 12.

Panel 4: Response of LOG(RES DEPOSITS/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(RESERVABLE DEPOSITS/CPI) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(RESERVABLE DEPOSITS/CPI) declines significantly and reaches its trough about -0.006 around month 6. It increases gradually and becomes insignificant by month 12.

Panel 5: Response of LOG(MNG LIAB/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(MANAGED LIABILITIES/CPI) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(MANAGED LIABILITIES/ CONSUMER PRICE INDEX) increases significantly and reaches its peak about 0.005 around month 8. It tapers off and becomes insignificant by month 12.

Panel 6: Response of LOG(SECURITIES/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/CPI) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(SECURITIES/CPI) is negative over the entire forecast horizon, which declines, becomes significantly negative around month 10, reaches its trough about -0.004 around month 12. It increases gradually and becomes insignificant by month 16.

Panel 7: Response of UNEMP to FFR. Data plotted as a curve. X axis displays the response and the standard errors of UNEMPLOYMENT RATE to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of UNEMPLOYMENT RATE is never significant over the forecast horizon although it is negative until month 12, and becomes positive afterwards.

Figure 4: Bernanke and Blinder Updated (1959-1978)

Seven panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors.

Panel 1: Response of FFR to FFR. Data plotted as a curve. X axis displays the response and the standard errors of federal funds rate (FFR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of FFR increases significantly and reaches its peak about 0.4 around month 6. It tapers off and becomes insignificant by month 9. It follows a declining trend and becomes significant again by month 20.

Panel 2: Response of LOG(CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(CONSUMER PRICE INDEX) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(CONSUMER PRICE INDEX) increases significantly and reaches its peak about 0.002 around month 12. It tapers off and becomes insignificant by month 21.

Panel 3: Response of LOG(LOANS/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/CONSUMER PRICE INDEX) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(LOANS/CONSUMER PRICE INDEX) is positive for first 6 month and insignificant . It tapers off and becomes negative by month 6 and significant by month 8. It continues to decline over the rest of the forecast horizon and ends up around -0.10 by month 24.

Panel 4: Response of LOG(RES DEPOSITS/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(RESERVABLE DEPOSITS/ CONSUMER PRICE INDEX) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(RESERVABLE DEPOSITS/ CONSUMER PRICE INDEX) is negative over the entire forecast horizon, reaches its trough about -0.006 around month 20. It becomes significant by month 6 and reaches -0.008 by month 24.

Panel 5: Response of LOG(LG DEPOSITS/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/ CONSUMER PRICE INDEX) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(LARGE TIME DEPOSITS / CONSUMER PRICE INDEX) is never significant over the forecast horizon, and it is negative

Panel 6: Response of LOG(SECURITIES/CPI) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/ CONSUMER PRICE INDEX) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOG(SECURITIES/ CONSUMER PRICE INDEX) is negative over the entire forecast horizon, which declines, and hovering around -0.010 around month 12. It increases gradually and becomes insignificant by month 18.

Panel 7: Response of UNEMP to FFR. Data plotted as a curve. X axis displays the response and the standard errors of UNEMPLOYMENT RATE to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of UNEMPLOYMENT RATE is negative for the first 8 months, reaches its trough about -0.04 by month 7 and is insignificant. It increases gradually and becomes significant by month 11. It reaches its peak about 0.10 around month 20.

Figure 5: Bernanke and Blinder Updated (Cont'd)

Four panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors.

Panel 1: Response of DEPOSITS to LOANS. Data plotted as a curve. X axis displays the response and the standard errors of DEPOSITS to a one standard deviation shock to LOANS. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of DEPOSITS is never significant over the forecast horizon, and it is negative after month 8.

Panel 2: Response of MNG LIAB to LOANS. Data plotted as a curve. X axis displays the response and the standard errors of MANAGED LIABILITIES to a one standard deviation shock to LOANS. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of MANAGED LIABILITIES is positive over the entire forecast horizon. It starts at a significant value around 0.05 and reaches its peak about 0.006 around month 3. It decreases gradually and hovers around 0.004 until the rest of the forecast horizon. It becomes insignificant by month 9.

Panel 3: Response of LOANS to DEPOSITS. Data plotted as a curve. X axis displays the response and the standard errors of LOANS to a one standard deviation shock to DEPOSITS. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOANS is negative after the month 3, which declines, and becomes significantly negative around month 5, reaches its trough about -0.002 around month 5. It becomes insignificant by month 7.

Panel 4: Response of LOANS to MNG LIAB. Data plotted as a curve. X axis displays the response and the standard errors of LOANS to a one standard deviation shock to MANAGED LIABILITIES. Y axis displays the estimation horizon, which is 24 months. This panel shows that the response of LOANS is positive over the entire forecast horizon. It increases and becomes significantly positive, reaches its peak about 0.002 around month 6. It declines gradually, and becomes insignificant by month 7.

Figure 6: The Response of Bank Loans under Counterfactual Experiments

One panel. The figure plots the response of loans to a 25 basis points shock to FFR.

Panel 1: Response of LOANS to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOANS to a 25 basis points shock to FFR.

Three different responses are calculated. The original response shown in Figure 3, the response when managed liabilities are suppressed, and the response when reservable deposits are suppressed. Y axis displays the estimation horizon, which is 24 months. This panel shows that the original response of loans plotted in figure 3 is not sensitive to alternative counterfactual experiments. The three response functions are not significantly different from each other.

Figure 7: The Response of Different Bank Liabilities under Counterfactual Experiments

Two panels. The figure plots the response to a 25 basis points shock to FFR.

Panel 1: Response of Managed Liabilities to FFR. Data plotted as a curve. X axis displays the response and the standard errors of Managed Liabilities to a 25 basis points shock to FFR. Two different responses are calculated. The original response shown in Figure 3 and the response when loans are suppressed. Y axis displays the estimation horizon, which is 24 months. This panel shows that the original response of managed liabilities plotted in figure 3 is somewhat sensitive to the counterfactual experiment. The response of managed liabilities under the counterfactual experiment is significantly smaller relative to the original impulse response function between months 7 to 12.

Panel 2: Response of Reservable Deposits to FFR. Data plotted as a curve. X axis displays the response and the standard errors of Reservable Deposits to a 25 basis points shock to FFR.

Two different responses are calculated. The original response shown in Figure 3and the response when loans are suppressed. Y axis displays the estimation horizon, which is 24 months. This panel shows that the original response of reservable deposits plotted in figure 3 is not sensitive to alternative counterfactual experiments. The impulse response function from the counterfactual experiment is not

significantly different from the original impulse response function

Figure 8: The Response of Different Bank Liabilities under Counterfactual Experiments

Two panels. The figure plots the response of loans to a 25 basis points shock to FFR.

Panel 1: Response of Managed Liabilities to FFR. Data plotted as a curve. X axis displays the response and the standard errors of Managed Liabilities to a 25 basis points shock to FFR. Two different responses are calculated. The original response and the response when CD rate is suppressed. Y axis displays the estimation horizon, which is 24 months. This panel shows that the original response of managed liabilities is somewhat sensitive to the counterfactual experiment. The response of managed liabilities under the counterfactual experiment is significantly smaller relative to the original impulse response function between months 6 to 10.

Panel 2: Response of Managed Liabilities to FFR. Data plotted as a curve. X axis displays the response and the standard errors of Managed Liabilities to a 25 basis points shock to FFR. Two different responses are calculated. The original response shown in Figure 3 and the response when Loans and CD rate are suppressed. Y axis displays the estimation horizon, which is 24 months. This panel shows that the original response of managed liabilities is sensitive to the counterfactual experiment. The response of managed liabilities under the counterfactual experiment is significantly smaller relative to the original impulse response function between months 4 to 11.

Figure 9: VAR Analysis at the Quarterly Frequency

Ten panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors.

Panel 1: Response of UNEMP to FFR. Data plotted as a curve. X axis displays the response and the standard errors of UNEMPLOYMENT to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of UNEMPLOYMENT is hovering around zero and never significant across the forecast horizon.

Panel 2: Response of LOG(GDP/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(GDP/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(GDP/GDP DEFLATOR) is negative over the forecast horizon, which declines, becomes significantly negative around quarter 4, reaches its trough about -0.002 around quarter 4. It increases gradually and becomes insignificant by quarter 5.

Panel 3: Response of LOG(GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(GDP/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(GDP/GDP DEFLATOR) declines and becomes significantly negative around quarter 2, reaches its trough about -0.0008. It increases after that quarter but the rest of the response is insignificant.

Panel 4: Response of LOG(RR/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(REQUIRED RESERVES/GDP_DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(REQUIRED RESERVES/GDP_DEFLATOR) is hovering around zero and never significant across the forecast horizon.

Panel 5: Response of LOG(BANK_CRDT/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TOTAL BANK LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(TOTAL BANK LOANS/GDP DEFLATOR) increases and becomes significantly positive, and reaches its peak about 0.002 around quarter 2. It tapers off and becomes negative and insignificant by quarter 2.

Panel 6: Response of LOG(TOTAL_NONFIN/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TOTAL NON-FINANCIAL BORROWING/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(TOTAL NON-FINANCIAL BORROWING/GDP DEFLATOR) is negative over the entire forecast horizon. It declines significantly and reaches its trough about -0.002 around quarter 3. It increases gradually and becomes insignificant by quarter 4.

Panel 7: Response of LOG(RES DEPOSITS/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(RESERVABLE DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(RESERVABLE DEPOSITS/GDP DEFLATOR) is never significant over the forecast horizon. It decreases, and is negative until quarter 4, and becomes positive afterwards.

Panel 8: Response of LOG(MNG LIAB/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(MANAGED LIABILITIES/GDP_DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of LOG(MANAGED LIABILITIES/GDP_DEFLATOR) is never significant over the forecast horizon. It increases, and is positive, until quarter 4, and becomes negative afterwards.

Panel 9: Response of LOG(SECURITIES/GDP_DEFL) to FFR. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 months. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is never significant over the forecast horizon. It increases and is positive, until quarter 2, and becomes negative afterwards.

Panel 10: Response of FFR to FFR. Data plotted as a curve. X axis displays the response and the standard errors of FFR to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 8 quarters. This panel shows that the response of FFR is positive over the forecast horizon, which increases and becomes significantly positive around quarter 2, and reaches its peak about 0.2 around quarter 2. It tapers off, and becomes insignificant by quarter 3.

Figure 10: Panel VAR Analysis (Breakdown with respect to Asset Size)

Twelve panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors. The figure is divided to three main columns based on a breakdown based on the asset size. Large banks are shown on the left column, medium banks are shown in the middle column, and small banks are shown in the right column.

Panel 1: Response of LOG(LOANS/GDP_DEF) to FFR for LARGE BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) is negative and significant in the first quarter. It remains negative until quarter 2, which increases, and becomes positive afterwards. It becomes insignificant by around quarter 2.

Panel 2: Response of LOG(LOANS/GDP_DEF) to FFR for MEDIUM BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) is negative and significant until quarter 2. The remainder of the response is not significant although it is temporarily positive in quarter 2 and negative afterwards.

Panel 3: Response of LOG(LOANS/GDP_DEF) to FFR for SMALL BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) increases from -0.001 and reaches its peak about 0.004 around quarter 2. It declines gradually and becomes negative again by quarter 3. It reaches -0.004 by quarter 7. The entire response is significant.

Panel 4: Response of LOG(TRANS. DEP/GDP DEF) to FFR for LARGE BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is significant and negative until quarter 2. It becomes positive and insignificant over the forecast horizon.

Panel 5: Response of LOG(TRANS. DEP/GDP DEF) to FFR for MEDIUM BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is significant and negative over the forecast horizon. It increases and reaches its peak about - 0.008 around quarter 4, and tapers off slightly.

Panel 6: Response of LOG(TRANS. DEP/GDP DEF) to FFR for SMALL BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 months. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases, and reaches its peak about - 0.014 around quarter 2, and tapers off by quarter 2. It reaches -0.020 by quarter 7.

Panel 7: Response of LOG(LG TIME/GDP DEF) to FFR for LARGE BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive and increasing over the forecast horizon. It becomes significant by quarter 3 reaches 0.03 at quarter 7.

Panel 8: Response of LOG(LG TIME/GDP DEF) to FFR for MEDIUM BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive, increasing, and significant over the forecast horizon. It reaches over 0.020 at quarter 7.

Panel 9: Response of LOG(LG TIME/GDP DEF) to FFR for SMALL BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive, increasing, and significant over the forecast horizon. It reaches about 0.09 at quarter 7.

Panel 10: Response of LOG(SEC/GDP DEF) to FFR for LARGE BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is never significant over the forecast horizon. It is around 0.00 at quarter 2, and negative except quarter 2.

Panel 11: Response of LOG(SEC/GDP DEF) to FFR for MEDIUM BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative and significant over the forecast horizon, which increases and reaches its peak about - 0.008 around quarter 2, and decreases slightly after quarter 2.

Panel 12: Response of LOG(SEC/GDP DEF) to FFR for SMALL BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative, declining, and significant over the forecast horizon, which declines from -0.002 in quarter 2 to -0.012 at quarter 7.

Figure 11a: Panel VAR Analysis (Breakdown with respect to Securities/Assets Ratio)

Twelve panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors. The figure is divided to three main columns based on a breakdown based on the Securities/Assets ratio. The least liquid banks are shown on the left column, liquid banks are shown in the middle column, and the most liquid banks are shown in the right column.

Panel 1: Response of LOG(LOANS/GDP_DEF) to FFR for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) increases from -0.002 in quarter 1 significantly and reaches its peak about 0.002 around quarter 2. It declines gradually and becomes negative again by quarter 2. It reaches -0.008 by quarter 7. The entire response is significant.

Panel 2: Response of LOG(LOANS/GDP_DEF) to FFR for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) decreases significantly from about 0.0035 in quarter 1 and becomes negative by quarter 3, and reaches around -0.004 at quarter 7.

Panel 3: Response of LOG(LOANS/GDP_DEF) to FFR for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) is positive over the forecast horizon, increases significantly and reaches its peak about 0.007 around quarter 2. It tapers off and becomes insignificant by quarter 5.

Panel 4: Response of LOG(TRANS. DEP/GDP DEF) to FFR for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is significant, and negative over the forecast horizon. It increases and reaches its peak about - 0.014 around quarter 2, and decreases significantly by quarter 2. It reaches -0.022 by quarter 7.

Panel 5: Response of LOG(TRANS. DEP/GDP DEF) to FFR for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases and reaches its peak about - 0.006 around quarter 2, and decreases gradually by quarter 2 and reaches -0.020 by quarter 7.

Panel 6: Response of LOG(TRANS. DEP/GDP DEF) to FFR for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases significantly and reaches its peak about - 0.012 around quarter 2, and decreases gradually by quarter 2 and reaches around -0.018 by quarter 7.

Panel 7: Response of LOG(LG TIME/GDP DEF) to FFR for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive, increasing, and significant over the forecast horizon. It reaches 0.010 at quarter 7.

Panel 8: Response of LOG(LG TIME/GDP DEF) to FFR for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive over the entire forecast horizon, which declines, reaches its trough about 0.001 around quarter 2, insignificantly. It increases gradually, and becomes significant by quarter 3. It increases thereof and reaches about 0.008 by quarter 7.

Panel 9: Response of LOG(LG TIME/GDP DEF) to FFR for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) decreases significantly, and reaches its trough about -0.006 about quarter 2, and increases gradually afterwards. It becomes insignificant around quarter 3 and becomes significant by quarter 5. It reaches about 0.003 by quarter 7.

Panel 10: Response of LOG(SEC/GDP DEF) to FFR for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative over the forecast horizon, and reaches its peak about -0.001 around quarter 2, insignificantly. It decreases significantly by quarter 3 and reaches about -0.002 by quarter 7.

Panel 11: Response of LOG(SEC/GDP DEF) to FFR for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative and significant over the forecast horizon,. It declines steadily and reaches its trough about -0.013 around quarter 5. It increases to -0.012 by quarter 7.

Panel 12: Response of LOG(SEC/GDP DEF) to FFR for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative, significant, and declining over the forecast horizon and significant. It declines from -0.008 in quarter 1 and reaches -0.020 by quarter 7.

Figure 11b: Panel VAR Analysis (Breakdown with respect to Securities/Assets Ratio)

Fifteen panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors. The figure is divided to three main columns based on a breakdown based on the Securities/Assets ratio. The least liquid banks are shown on the left column, liquid banks are shown in the middle column, and the most liquid banks are shown in the right column.

Panel 1: Response of LOG(LOANS/GDP_DEF) to LOG(LG. TIME/GDP DEF) for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(LARGE TIME DEPOSITS/GDP DEFLATOR). Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LOANS/GDP DEFLATOR) increases significantly, and is always positive over the forecast horizon and reach about 0.010 at quarter 7.

Panel 2: Panel 1: Response of LOG(LOANS/GDP_DEF) to LOG(LG. TIME/GDP DEF) for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(LARGE TIME DEPOSITS/GDP DEFLATOR). Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LOANS/GDP DEFLATOR) increases significantly, and is always positive over the forecast horizon and reach about 0.008 at quarter 7.

Panel 3: Panel 1: Response of LOG(LOANS/GDP_DEF) to LOG(LG. TIME/GDP DEF) for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(LARGE TIME DEPOSITS/GDP DEFLATOR). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) increases significantly, and is always positive over the forecast horizon and reach about 0.002 at quarter 7.

Panel 4: Response of LOG(LG. TIME/GDP DEF) to LOG(LOANS/GDP_DEF) for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(LOANS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) increases significantly, and reaches its peak about 0.056 at quarter 2. It is always positive, and significant over the forecast horizon. It reaches 0.045 at quarter 7.

Panel 5: Response of LOG(LG. TIME/GDP DEF) to LOG(LOANS/GDP_DEF) for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(LOANS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) increases significantly, which reaches its peak about 0.044 at quarter 3 and it declines gradually. It is always positive, and significant over the forecast horizon. It reaches 0.043 at quarter 7.

Panel 6: Response of LOG(LG. TIME/GDP DEF) to LOG(LOANS/GDP_DEF) for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(LOANS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) increases significantly, and reaches its peak about 0.029 at around quarter 2 and it declines gradually afterwards. It is always positive, and significant over the forecast horizon. It reaches 0.028 at quarter 7.

Panel 7: Response of LOG(LG. TIME/GDP DEF) to LOG(TRANS. DEP/GDP_DEF) for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is negative, and significant over the forecast horizon, and declines from -0.000 in quarter 1 and reaches about -0.015 by quarter 7.

Panel 8: Response of LOG(LG. TIME/GDP DEF) to LOG(TRANS. DEP/GDP_DEF) for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) decreases significantly, and reaches its trough about -0.006 around quarter 2, which increases gradually afterwards. It becomes insignificant by quarter 4.

Panel 9: Response of LOG(LG. TIME/GDP DEF) to LOG(TRANS. DEP/GDP_DEF) for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is significant and negative in quarter 1 (-0.002) but never significant afterwards over the forecast horizon. It reaches its peak about 0.001 around quarter 2.

Panel 10: Response of LOG(LOANS/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) is negative over the forecast horizon, and decreases significantly. It reaches about -0.009 at around quarter 7.

Panel 11: Response of LOG(LOANS/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LOANS/GDP DEFLATOR) becomes significant and positive after quarter 3. It increases significantly thereafter and reaches 0.003 by quarter 7.

Panel 12: Response of LOG(LOANS/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(LOANS/GDP DEFLATOR) decreases significantly, and reaches its trough about -0.002 around quarter 2. It increases gradually, and becomes insignificant after quarter 2.

Panel 13: Response of LOG(SEC/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for LEAST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) ) is significant and positive over the forecast horizon. It decreases gradually by quarter 2 and reaches 0.016 by quarter 7.

Panel 14: Response of LOG(SEC/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) declines significantly from around 0.016, and becomes insignificant by around quarter 4. It is negative by quarter 6.

Panel 15: Response of LOG(SEC/GDP_DEF) to LOG(TRANS. DEP/GDP_DEF) for MOST LIQUID BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to LOG(TRANSACTION DEPOSITS/GDP DEFLATOR ). Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) increases significantly, and reaches its peak about 0.017 at around quarter 2. It declines gradually afterwards. It is always positive and significant over the forecast horizon. It reaches 0.004 by quarter 7.

Figure 12: Panel VAR Analysis (Breakdown with respect to Capital/Assets Ratio)

Twelve panels. The figure plots the response to Cholesky one standard deviation innovations plus and minus two standard errors. The figure is divided to three main columns based on a breakdown based on the Capital/Assets ratio. The undercapitalized banks are shown on the left column, adequately capitalized banks are shown in the middle column, and the well capitalized banks are shown in the right column.

Panel 1: Response of LOG(LOANS/GDP_DEF) to FFR for UNDERCAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) starts at a significant -0.002, increases significantly, and reaches its peak about 0.001 around quarter 2. It tapers off, and becomes negative after quarter 2. It reaches -0.006 by quarter 7.

Panel 2: Response of LOG(LOANS/GDP_DEF) to FFR for ADEQUATELY CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) starts at a significant -0.002, increases significantly, and reaches its peak about 0.001 around quarter 2. It tapers off, and becomes negative after quarter 2. It reaches -0.008 by quarter 7.

Panel 3: Response of LOG(LOANS/GDP_DEF) to FFR for WELL CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LOANS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LOANS/GDP DEFLATOR) starts at a significant -0.002, increases significantly and reaches its peak about 0.005 around quarter 2. It tapers off, and becomes insignificant between quarters 4 and 5. It becomes negative and significant after quarter 5 and reaches -0.002 by quarter 7.

Panel 4: Response of LOG(TRANS. DEP/GDP DEF) to FFR for UNDERCAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases and reaches its peak about - 0.012 around quarter 2, and decreases significantly afterwards, reaching -0.028 by quarter 7.

Panel 5: Response of LOG(TRANS. DEP/GDP DEF) to FFR for ADEQUATELY CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases and reaches its peak about - 0.013 around quarter 2, and decreases significantly by quarter 2, reaching -0.024 by quarter 7.

Panel 6: Response of LOG(TRANS. DEP/GDP DEF) to FFR for WELL CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(TRANSACTION DEPOSITS/GDP DEFLATOR) is negative and significant over the forecast horizon. It increases and reaches its peak about - 0.013 around quarter 3, and decreases gradually by quarter 3 and reaches -0.015 by quarter 7.

Panel 7: Response of LOG(LG TIME/GDP DEF) to FFR for UNDERCAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive over the forecast horizon and significant. It starts to increase from 0.004, significantly and reaches 0.008 by quarter 7.

Panel 8: Response of LOG(LG TIME/GDP DEF) to FFR for ADEQUATELY CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is positive over the forecast horizon and significant. It starts to increase from 0.003, significantly and reaches 0.009 by quarter 7.

Panel 9: Response of LOG(SEC/GDP DEF) to FFR for WELL CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(LARGE TIME DEPOSITS/GDP DEFLATOR) is negative and insignificant around quarter 2. It increases and becomes positive and significant after quarter 2. It reaches about 0.012 at quarter 7.

Panel 10: Response of LOG(SEC/GDP DEF) to FFR for UNDERCAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative over the forecast horizon and significant. It declines from -0.004, significantly and reaches -0.012 at quarter 7.

Panel 11: Response of LOG(SEC/GDP DEF) to FFR for ADEQUATELY CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters. This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative over the forecast horizon and significant. It declines from -0.003, significantly and reaches -0.08 at quarter 7.

Panel 12: Response of LOG(SEC/GDP DEF) to FFR for WELL CAPITALIZED BANKS. Data plotted as a curve. X axis displays the response and the standard errors of LOG(SECURITIES/GDP DEFLATOR) to a one standard deviation shock to FFR. Y axis displays the estimation horizon, which is 7 quarters.

This panel shows that the response of LOG(SECURITIES/GDP DEFLATOR) is negative over the forecast horizon and significant. It declines from -0.003, significantly and reaches -0.012 at quarter 7.