Credit Channel of Monetary Policy between Australia and New Zealand: an Empirical Note

Some economists argue that a monetary tightening shifts the supply schedule of bank loans left, thereby forcing bank-dependent borrowers to cut back on expenditures. This is the credit view. In the literature, the credit view is typically studied in a closedeconomy context. In reality, however, banks make international loans through their overseas branches and subsidiaries. This short paper tests the credit view in an openeconomy context: a monetary-policy shock originated in one country propagates to another through banks’ shifts of funds between the two countries. For this purpose, the paper uses the data on Australia and New Zealand because Australian-owned banks dominate the banking market in New Zealand. A significant finding is that the supply schedule of loans shifts left in New Zealand after a monetary tightening in Australia.