This paper shows that the disproportionate impact of tight monetary policy on banks' ability to lend is largely the consequence of Federal Reserve actions aimed at reducing bank loans directly, rather than an inherent feature of the monetary transmission mechanism. We provide two types of evidence for this conclusion. First, a detailed examination of nine postwar episodes of contractionary monetary policy shows that while short-term interest rates always rose in response to tight policy, banks typically found ways of maintaining lending despite the falls in reserves. Banks' ability to lend was particularly affected by tight policy only when the Federal Reserve undertook actions, such as special reserve requirements, moral suasion, or explicit credit controls, to restrain bank lending directly. Second, simple regressions show that Federal Reserve credit actions have large and significant effects on the composition of external finance between bank loans and commercial paper and on the spread between the prime bank loan rate and the commercial paper rate, and that a bank credit channel of monetary transmission is not needed to explain the movements in these variables in response to tight policy.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4485.
Length: Date of creation: Jun 1994 Date of revision: Publication status: published as Changing Capital Markets: Implications for Monetary Policy: The Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 19-21, 1993.pp. 71-116 Handle: RePEc:nbr:nberwo:4485
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Raymond E. Owens & Stacey L. Schreft, 1993.
"Identifying credit crunches,"
Working Paper
93-02, Federal Reserve Bank of Richmond.
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Christina D. Romer & David H. Romer, 1994.
"What Ends Recessions?,"
NBER Working Papers
4765, National Bureau of Economic Research, Inc.
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