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Inside the Black Box: The Credit Channel of Monetary Policy Transmission

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  • Ben S. Bernanke
  • Mark Gertler

Abstract

The 'credit channel' theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight-money periods. The resulting increase in the external finance premium--the difference in cost between internal and external funds--enhances the effects of monetary policy on the real economy. The authors document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. They discuss two main components of this mechanism, the balance sheet and bank lending channels. The authors argue that forecasting exercises using credit aggregates are not valid tests of this theory.

Suggested Citation

  • Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  • Handle: RePEc:aea:jecper:v:9:y:1995:i:4:p:27-48
    Note: DOI: 10.1257/jep.9.4.27
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    References listed on IDEAS

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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    1. Advanced Monetary Theory and Policy (ECON 447)

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