BANK PORTFOLIO COMPOSITION AND MACROECONOMIC ACTIVITY

This paper examines the effects of bank portfolio composition by compu ting variance decompositions from a vector autoregressive model that c omprises a portfolio composition variable (the ratio of commercial and industrial loans to total loans and security holdings), output, the p rice level, an interest rate, the money supply, and a supply shock var iable. Using data from 1974:7-1989:12 and 1979:10-1989:12, bank portfo lio composition is found to have significant effects on macro variable s. Whether these effects should be interpreted as the result of moneta ry policy actions or the response to changes in loan demand is discuss ed.