Principal investigator: Angelo Cruz do Nascimento Varella
Article title: Impact of Monetary Policy Shocks on Regional Credit Supply: An Econometric Analysis Using the VAR Methodology for Brazil in the 2000s
Article authors: Leonardo Dondoni Dutra, Carmem Aparecida do Valle Feijó and Julio Cesar Albuquerque Bastos
Location of the intervention: Brazil
Sample size: Municipal banking statistics from 2003 to 2012
Sector: Finances
Type of Intervention: Effects of concentration of banks and national credit supply.
Main Variable of Interest: Regional credit offer
Evaluation method: Others
Policy Problem
Monetary policy is of great importance to a country's economy, since it is through this system that the government controls the amount of money in circulation, using tools such as the basic interest rate (SELIC) and indicators such as those that measure inflation. However, these public policies have natural limitations to the financial system, so that the measures taken do not always achieve the desired objectives. This is the case, for example, with the availability and ease of access to credit, which is an indicator that has a direct impact on national economic development. One of the problems affecting the supply of credit in Brazil is identified by researchers as a consequence of the way the banking system is established in the country, with a concentration of services in the richest and most populous areas.
This difference between regions is a relevant issue, as the availability of credit can influence income and job creation, the amount of investment, and local production, which are fundamental factors in a region's economic development.
Assessment Context
In Brazil, one of the ways to implement public monetary policies is determined by the Monetary Policy Committee (COPOM) of the Central Bank (BACEN), which sets the SELIC rate in meetings that take place every 45 days. These meetings define the most basic interest rate in the economy, which influences all other interest rates applied in the country.
Thus, when the SELIC rate decreases, obtaining money through loans and financing becomes easier, and the economy becomes more liquid and heated, meaning there is more money circulating. Conversely, if the SELIC rate increases, interest rates become more expensive, and the economy tends to cool down. Obviously, the banking sector has a great influence on this system.
It is through banks that access to credit occurs, so the adjustment of the SELIC rate effectively passes through these institutions of the financial system. However, in Brazil, the concentration of the banking system in populous regions with more consolidated economies generates inefficiency in credit granting, creating a barrier to credit access in poorer regions that negatively impacts local economic development.
Policy Details
Theoretically, the government's intention is to influence the economy as a whole, in a homogeneous way, so that monetary policy affects all regions equally. However, in the Brazilian case, banking concentration alters the impacts of this public policy in places with fewer people and resources. As a consequence, already economically disadvantaged regions suffer even more.
This phenomenon also occurs due to two very important factors in economics: uncertainty and liquidity. Uncertainty affects the supply of credit because it transforms the act of investing into a more risky activity. In other words, in uncertain scenarios, banks will prefer to invest in safer options in order to avoid losses. Furthermore, under these circumstances, banks will prefer more liquid options, meaning that these institutions will choose to invest in assets that can be converted into cash more quickly.
These variables are investigated by researchers, along with data on the volume of credit actually granted in Brazil, with the intention of ascertaining whether the behavior of banks differs across various Brazilian regions in a situation where interest rates increase.
Methodology Details
Using the Municipal Banking Statistics (ESTBAN) database from the Central Bank of Brazil (Bacen), researchers analyze monthly information on Brazilian municipal credit granting between January 2003 and December 2012. Based on this database, two mathematical models are developed to measure the reaction of the national banking system to a monetary policy of increasing the SELIC rate, the basic interest rate.
The econometric model used for both calculations is the vector autoregressive (VAR) model, which is essentially a mathematical formula used to analyze time series, that is, standardized data sets that vary over time. With this model, it is possible to determine if there has been a change in the behavior of banks as a result of the increase in interest rates.
Initially, the authors assess whether the positive impact on interest rates affects the preference for bank liquidity and the provision for doubtful loans, as a measure of uncertainty. The lower the preference for liquidity and the greater the amount of credit granted, the more banks are contributing to the heating up of the regional economy. Secondly, the authors measure the amount of short-term credit provided and credit destined for production and agriculture. Thus, in addition to measuring the impact on liquidity preference and the treatment of uncertainty, the real impact that monetary policy has had on different regional banking systems is also analyzed.
Results
The following graphs show the results of the analyses for liquidity preference (upper block) and credit provision with a higher degree of uncertainty (lower block). In all regions, it is possible to observe that higher interest rates generate a lower preference for liquidity. This occurs because higher interest rates incentivize banks to lend in order to earn more. It is worth noting, however, that the Southeast region, concentrating almost 70% of the total national credit supply, stabilizes more quickly, returning to pre-interest rate increase levels after ten months. In other regions, this normalization takes twice as long. Similar behavior occurs in relation to the uncertainty measure, where the Southeast region shows the shortest adjustment period, of only seven months after the positive interest rate shock.
Regarding the volume of regional credit granted, it is possible to observe that the Southeast region has the most robust banking system, best prepared to efficiently handle variations in monetary policy, across all modalities analyzed. In other regions, short-term credit options show a strong tendency, even in circumstances of rising interest rates, with banks using such mechanisms in these locations to increase their profitability. Other credit offerings vary from region to region.
Lessons in Public Policy
Ensuring the efficiency of the banking sector is essential for the success of an economy. Specifically in the Brazilian case, this efficiency is diminished by the distinct characteristics of each region. The Southeast region, for example, in addition to concentrating a large part of the national wealth and population, also has the largest and most robust banking system in the country.
As a consequence, the concentration of banking services constitutes a serious obstacle to regional economic development. Adequate access to credit is a determining factor in financial equilibrium and the effective implementation of public policies, such as monetary policy. It is necessary for the government to act to mitigate these differences, reducing existing incentives for financial institutions to harm less economically developed regions, aiming to improve not only the national economic system but also the efficiency of Brazilian monetary policy.
Reference
DUTRA, Leonardo Dondoni; DO VALLE FEIJÓ, Carmem Aparecida; BASTOS, Julio Cesar Albuquerque. Impact of monetary policy shocks on regional credit supply: An econometric analysis using the VAR methodology for Brazil in the 2000s. Brazilian Keynesian Review, v. 3, n. 1, p. 48-74, 2017.
