Monetary policy surprises and employment: evidence from matched bank-firm loan data on the bank lending-channel

BIS Working Papers  |  No 799  | 
31 July 2019


This paper evaluates the impacts of monetary policy surprises on credit supply and employment using comprehensive loan and firm-level data from Brazil. Heterogeneities across financial intermediaries are relevant for the transmission of monetary policy at large, in particular, bank capital. However, identification of unexpected monetary policy shocks can be challenging. In this this paper, I rely on a high-frequency identification strategy to disentangle expected and unexpected MP shocks and I estimate the bank lending channel of monetary policy surprises, the amplifying (attenuating) power of bank weakness (strength) in this transmission channel, and related effects on firms' labor demand.


The bank lending channel of monetary policy has been extensively documented, but the typical identification of unexpected monetary shocks usually entails Taylor residuals, a narrative approach, or non-instrumentation at all. Instead, I explore changes in interest rate derivatives immediately after each monetary policy committee announcement for sharper identification. I also document related real effects on firms' outcomes and the amplifying/alleviating power of financial intermediaries' strength in this transmission channel.


I find that unexpected monetary shocks identified using high-frequency data have both absolute and compositional effects on credit supply and on employment. Non-instrumentation of monetary policy or the use of Taylor residuals leads to attenuated results consistent with an errors-in-variable problem. Monetary policy surprises have strong effects on firms' credit intake and employment outcomes, but firms connected to stronger banks (with 4% higher capital-to-assets ratio) alleviate about one-third of these effects on credit and two-thirds on employment.


This paper investigates the bank lending-channel of monetary policy (MP) surprises. To identify the effects of MP surprises on credit supply, I take the changes in interest rate derivatives immediately after each MP announcement and bring this high-frequency identification strategy to comprehensive and matched bank-firm data from Brazil. The results are robust and stronger than those obtained with Taylor residuals or the reference rate. Consistently with theory, heterogeneities across financial intermediaries, e.g. bank capital, are relevant. Firms connected to stronger banks mitigate about one third of the effects of contractionary MP on credit and about two thirds on employment.

JEL codes: E52, E51, G21, G28

Keywords: employment, monetary policy, surprises, loan-level, lending channel