infonet-economy

We identify the effects of monetary policy on bank risk-taking with an exhaustive credit register containing loan contracts and applications since 1984. We separate the compositional changes in the credit supply from the demand, firm and bank balance-sheet channels by accounting for both observed and unobserved time-varying firm and bank heterogeneity through time*firm and time*bank fixed effects. A lower overnight interest rate induces lower capitalized banks to expand and prolong credit to riskier firms, and to lend to riskier new applicants, granting them loans that are larger and longer-term. A lower long-term rate, however, has smaller or no such effects.