Author

Birendra Bahadur Budha

Abstract

This paper examines the bank lending channel of monetary policy transmission in Nepal using
data during 2003-2012. Using the dynamic Arellano-Bond GMM estimation with annual data of
25 Nepalese commercial banks, this study tries to estimate the loan supply responses of Nepalese
commercial banks, depending on their balance sheet characteristics. The main results suggest that
banks play a role in Nepal’s monetary transmission mechanism. Empirical result shows that the
bank lending decreases after a monetary tightening. Bank size is found to have significant impact
on loan supply in Nepal. Similarly, liquidity in the case of private sector banks is also playing a
significant role in bank lending in response to monetary policy changes. But, capitalization is
found to have no significant impact on bank lending. The bank loan supply is also found to be
significantly affected by gross domestic product.