The Credit Market in Israel - Empirical Testing of the Credit Channel
This study examines the factors that determine unindexed bank credit using panel data for banks in Israel during the period 1996-2006. The use of such data makes it possible to test the effect of bank characteristics, such as size, liquidity, capital and the proportion of doubtful debts, on the reaction of the bank to changes in monetary policy. It was found that bank characteristics do have an influence on the quantity of credit provided by the bank. However, in contrast to studies in other countries, the influence of bank characteristics on the bank's reaction to changes in monetary policy was found not to be significant. It was also found that monetary policy has more of an effect on credit when the economy is in recession than when it is in a period of strong growth. An increase in the cost of loanable funds, together with a worsening in the banks' average capital ratio, and the slowing of GDP growth between 2000 and 2005, contributed to the slowdown in the growth of credit during those years.