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Monetary Policy and the Credit Channel, Broad and Narrow

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  • Torben W Hendricks

    (University of Duisburg-Essen, Universitaetsstr. 12, Essen 45117, Germany)

  • Bernd Kempa

    (University of Muenster, Universitaetsstr. 14–16, Muenster 48143, Germany)

Abstract

Two variants of the credit channel of monetary policy transmission can be distinguished: a narrow bank lending channel, measured in terms of the supply of bank loans, and a broad credit channel focusing on the external finance premium in credit markets. In this paper, both variants of the credit channel are identified by applying Markov-switching models on US bank lending and interest rate data. We find the credit channel to be particularly potent during periods of financial distress, such as during 1980s Savings and Loan debacle, the period following the bursting of the internet bubble in the early 2000s, or the financial crisis that started in the sub-prime segment of the US real estate market in 2007.

Suggested Citation

  • Torben W Hendricks & Bernd Kempa, 2011. "Monetary Policy and the Credit Channel, Broad and Narrow," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 37(3), pages 403-416.
  • Handle: RePEc:pal:easeco:v:37:y:2011:i:3:p:403-416
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    Cited by:

    1. Barnea, Emanuel & Landskroner, Yoram & Sokoler, Meir, 2015. "Monetary policy and financial stability in a banking economy: Transmission mechanism and policy tradeoffs," Journal of Financial Stability, Elsevier, vol. 18(C), pages 78-90.

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