How do changes in monetary policy affect bank lending? An analysis of Austrian bank data

Using a panel of Austrian bank data we show that the lending decisions of the smallest banks are more sensitive to interest rate changes, and that for all banks, sensitivity changes over time. We propose to estimate the groups of banks that display similar lending reactions by means of a group indicator which, after estimation, indicates each bank's classification. Additionally, we estimate a state indicator that indicates the periods during which the lending reaction differs from what we normally observe. Bayesian methods are used for estimation; a sensitivity analysis and a forecast evaluation confirm our model choice.