Monetary expansion and bank credit: A lack of spark

This study shows that the recent expansionary monetary policy pursued by the U.S. Federal Reserve has deactivated the credit channel of policy transmission. We develop a model of changes in the monetary base as a function of changes in excess reserves, vault cash, bank credit, as well as domestic and foreign security investments. We employ ordinary least squares regression optimized for impact lags, as well as generalized linear model with a logarithmic link function in the empirical tests for a sample period 1999–2014. We verify robustness of the obtained results with vector auto-regression estimations and impulse response functions. The tests provide consistent evidence that an increase in the monetary base has been associated with higher excess reserves, an increase in security investments, and a contraction of bank credit.