Critical Assessment of the Theory and Empirical Studies of the Bank Lending Channel: Special Reference to Transition Economies

Special Reference to Transition Economies

Abstract

This paper provides a critical assessment of the bank lending channel theory
established by Bernanke and Blinder (1988 a, b). It also investigates several
weaknesses and few additional modifications of the model found in the
literature. Related to the empirical literature for the bank lending channel,
this paper presents the most commonly used model by Ehrmann et al. (2001),
which is designed as a simplified version of Bernanke and Blinder (1988 a,
b) model. In addition, this paper critically surveys the empirical studies that
explore the major determinants of the bank lending channel in transition
economies from Central and South Eastern Europe (CSEE). According to the
results presented in various empirical studies, bank lending channel is
operational in majority of the transition economies from CSEE. Even though
the surveyed empirical studies have some shortcomings, overall they provide
solid results consistent with the bank lending channel theory.