There are many channels that the Fed uses to transmit monetary policy, bank lending channel being one of them. The lending view focuses on the potential fluctuations in loan supplied by banks have on aggregate activity due to a fall in Fed Reserves. This thesis investigates the significance of the bank lending channel because of its important effect on investment (and consequently, aggregate output). In addition, Institutional Memory, deteriorating memory in loan officers causing more loans to be processed at the top of the business cycle (Berger and Udell, 2002) is tested on Core loans using 4 lags (1 year) to find out if bank lending behavior exists.
Using Core loans (Commercial and Industrial, Real Estate, and Consumer loans) of commercial banks for the United States over a nineteen year period (1985-2004) results find significant evidence in the bank lending channel through Commercial & Industrial, and Real Estate loans. Firstly, through a correlation computation, it was found that Core loans were procyclical with aggregate output (GDP). Analyzing the [ cyclical] movements of Core loans around their trends with respect to Business cycle peaks, troughs, and GDP, it was found that Commercial & Industrial, and Real Estate loans provided supporting evidence on procyclical movements with the economy, implying the connection of the Federal Reserve and the economy through the bank lending channel is more effective through the aforementioned loans. Finally, four periods (1 year) in lags were used in autocorrelations to test for Institutional Memory. The computations find that Real Estate loans have a one year memory. This means that, for instance, if a recession were occurred today, Real Estate loans will not be affected until one year from today.
Barriga, Carlos, "Investigating the bank lending channel for monetary policy in the U.S. from 1985-2004" (2005). HIM 1990-2015. 486.