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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

The Effect of Banking Sector's Business Conditions on the Transmission Mechanism of Monetary Policy

Vol.27, No.3, September , 112–143


English Version |  Korean Version
  •   (Department of Economics, Ewha Womans University)

  •   (The Bank of Korea)

  •   (The Bank of Korea)

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Abstract  

In this paper, we estimate a dynamic factor model for Korean macro economy and banking sector's business conditions by using the FAVAR (Factor augmented vector autoregressive) model, and analyze impulse responses of various variables such as macro aggregates and banks' financial ratios.Our empirical analysis shows that the macro economy tends to affect the banking sector unilaterally over time. Next, in our counter-factual analysis where we artificially remove the effect of banking sector on the macro economy in the FAVAR model, we find that there is no substantial effect of banking sector's business conditions on the transmission mechanism of monetary policy.


Keywords
   FAVAR, banks' financial ratio, Transmission mechanism of monetary policy.

JEL classification codes
   E5, G2
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