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Historical Perspectives on the Monetary Transmission Mechanism

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  • Jeffrey A. Miron
  • Christina D. Romer
  • David N. Weil

Abstract

This paper examines changes over time in the importance of the lending channel in the transmission of monetary shocks to the real economy. We first use a simple extension of the Bernanke-Blinder model to isolate the observable factors that affect the strength of the lending channel. We then show that based on changes in the structure of banks assets, reserve requirements, and the composition of external firm finance, the lending channel should have been stronger before 1929 than during the post-World War II period, especially the first half of this period. Finally, we demonstrate that conventional indicators of the importance of the lending channel, such as the spread between the loan rate and the bond rate and the correlation between loans and output, do not show the predicted decline in the importance of lending over time. From this we conclude that either the traditional indicators are not useful measures of the strength of the lending channel or that the lending channel has not been quantitatively important in any era.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4326.

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Date of creation: Apr 1993
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Publication status: published as Monetary Policy, N. Gregory Mankiw, ed., (Chicago; University of Chicago Press: 1994).
Handle: RePEc:nbr:nberwo:4326

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  1. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers, C.V. Starr Center for Applied Economics, New York University 92-08, C.V. Starr Center for Applied Economics, New York University.
  2. Claudia Goldin & Hugh Rockoff, 1992. "Strategic Factors in Nineteenth Century American Economic History: A Volume to Honor Robert W. Fogel," NBER Books, National Bureau of Economic Research, Inc, number gold92-1, October.
  3. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(1), pages 47-74, August.
  4. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
  5. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  6. Raymond W. Goldsmith & Robert E. Lipsey & Morris Mendelson, 1963. "Studies in the National Balance Sheet of the United States, Vol. 2," NBER Books, National Bureau of Economic Research, Inc, number gold63-2, October.
  7. Michael Dotsey & Max Reid, 1992. "Oil shocks, monetary policy, and economic activity," Economic Review, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Jul, pages 14-27.
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Cited by:
  1. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  2. Craig Furfine, 1998. "Interbank payments and the daily federal funds rate," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-31, Board of Governors of the Federal Reserve System (U.S.).
  3. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(3), pages 451-471, April.
  4. Basistha, Arabinda & Kurov, Alexander, 2008. "Macroeconomic cycles and the stock market's reaction to monetary policy," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(12), pages 2606-2616, December.
  5. Joseph H. Davis & Christopher Hanes & Paul W. Rhode, 2009. "Harvests and Business Cycles in Nineteenth-Century America," NBER Working Papers 14686, National Bureau of Economic Research, Inc.
  6. Balazs Egert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable," CESifo Working Paper Series 1739, CESifo Group Munich.
  7. Michael S. Gibson, 1997. "The bank lending channel of monetary policy transmission: evidence from a model of bank behavior that incorporates long-term customer relationships," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 584, Board of Governors of the Federal Reserve System (U.S.).
  8. Brissimis, Sophocles N. & Magginas, Nicholas S., 2005. "Changes in financial structure and asset price substitutability: A test of the bank lending channel," Economic Modelling, Elsevier, Elsevier, vol. 22(5), pages 879-904, September.
  9. Riccardo Fiorentini & Roberto Tamborini, 1998. "Monetary policy, credit and aggregate supply: the evidence from Italy," Department of Economics Working Papers 9807, Department of Economics, University of Trento, Italia.
  10. Riccardo Fiorentini & Roberto Tamborini, 2001. "The Monetary Transmission Mechanism in Italy: The Credit Channel and a Missing Ring," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 60(1), pages 1-42, June.
  11. William B. English, 2002. "Financial consolidation and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 271-284.
  12. Fernando Barran & Virginie Coudert & Benoît Mojon, 1994. "Transmission de la politique monétaire et crédit, une application à 5 pays de l'OCDE," Working Papers 1994-03, CEPII research center.
  13. Christina D. Romer & David H. Romer, 1993. "Credit channel or credit actions? an interpretation of the postwar transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 71-149.

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