When tight gets tighter: Amplification of monetary policy through the banking channel in an emerging economy

Amid global monetary tightening, understanding how policy shocks propagate in emerging economies is critical. This paper examines the amplification of monetary policy transmission through the banking channel in Chile using quarterly Bank Lending Survey data (2003Q1–2023Q3) and a local projection framework. We find that lending standards and credit conditions tighten significantly following a positive monetary policy surprise, with effects amplified during periods of high policy rates ( ⩾ 5 % ) and when banks report capital constraints. These nonlinear responses are robust across major credit segments—consumption, mortgage, corporate, and small and medium-sized enterprises loans—with the strongest and most persistent effects in enterprise credit. Our findings highlight the state-contingent potency of monetary policy transmission through the banking channel in structurally similar emerging market economies and, from a policy perspective, underscore the importance of incorporating this dynamic into monetary policy design, as well as the need for coordination across macroeconomic policies. • We examine whether high policy rates and capital constraints amplify the bank lending channel in Chile. • Monetary policy shocks significantly tighten lending standards across four credit segments. • Tightening effects are amplified and more persistent during periods of high policy rates. • Effects are strongest in corporate and SME loans compared to household segments. • Results show the importance of banking dynamics for monetary policy design in EMEs.