Heterogeneous Bank Lending Responses to Monetary Policy: New Evidence from a Real-Time Identification

We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. We use a new policy measure identified from narratives on FOMC intentions and real-time economic forecasts. This policy measure eliminates some of the movements in the actual federal funds rate that are endogenous to expected economic conditions. We find much stronger dynamic effects, and greater heterogeneity, in U.S. bank lending responses to the new monetary policy measure compared with the standard measure based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy's effects with those of changes in expected macro fundamentals. In fact, estimates from identified monetary policy changes lead to a reversal of U.S. states' ranking by credit's sensitivity to policy. We also extend Romer and Romer (2004)' s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.