The dramatic increase in aggregate uncertainty during the Great Recession sparked an interest in the role of uncertainty on the effectiveness of financial sector intervention policies. In particular, banks have been a major source of frictions in the transmission of monetary policy, but the impact of uncertainty on their lending behavior has not received the attention it deserved. This paper empirically investigates the effects of aggregate uncertainty on the supply of credit and tests the hypothesis that the bank lending channel ofmonetary policy becomes less powerful in times of uncertainty. The data consist in the universe of U.S. commercial banks over the period 1984-2010, and simultaneity concerns are addressed by looking at the differential response of banks by how liquid their balance sheets are. The results suggest that aggregate uncertainty induces banks to curtail lending - all the more as they have less liquidity - and dampens the bank lending channel of monetary policy.
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Uncertainty and the Lending Channel of Monetary Policy