The purpose of this study is to investigate the presence of a bank lending channel of monetary policy in the Sierra Leone. This study uses a dynamic panel data method namely generalized method of moments (GMM) procedure, employing quarterly bank-level data spanning the period 2014-2018, to empirically investigate whether or not changes in the monetary policy in Sierra Leone influence bank lending behaviour, i.e., existence of a bank lending channel. It also examines the extent to which bank-level characteristics-size, liquidity and capital-affect the effectiveness of the monetary policy. Our result revealed that the monetary policy rate significantly and negatively influence s banks’ loan supply. Specifically, a 100 basis point increase in the monetary policy rate leads to a 0.43 percent decrease in loan supply to the economy. This lends support for the existence of the bank lending channel of monetary policy transmission in Sierra Leone and that banks do play a role in Sierra Leone’s monetary transmission mechanism. In addition, the interaction term between monetary policy variable and size has the positive sign and is statistically significant. The positive sign of the interaction term with size is consistent with the theoretical explanation of the bank lending channel, which assumes that lending volumes of larger banks are less sensitive to monetary policy conditions than that for smaller banks. Furthermore, commercial banks’ loan supply in Sierra Leone is also explained by past loan supply, economic activity (Real GDP) and inflation. However, we find that liquidity and bank capital do not influence banks’ loan supply. The statistical insignificance of the interaction term with capital and liquidity suggest s that bank capital and liquidity are not a source of asymmetric response of banks to monetary policy stance. The main policy implications that can be gleaned from this study are that, in assessing the stance of the monetary policy, beside the Monetary policy rate, it is important for the Central Bank to monitor the micro-dynamics of individual bank characteristics, as it relates to size, in order to enhance the efficacy of monetary policy impact on the real sector in Sierra Leone.
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