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In Search of the "Bank Lending Channel": Causality Analysis for the Transmission Mechanism of U.S. Monetary Policy

  • Bessler, David A.
  • Leatham, David J.
  • Yang, Juan

The bank lending channel states that changes in monetary policy cause changes in bank loans thus causing changes in real income. This implies the Federal Reserve can influence real income by controlling the level of intermediated loans. We apply a new method to test for an operative bank lending channel in the transmission mechanism of monetary policy. Combining an error correction model with directed acyclic graphs, we explore the existence of a bank lending channel and the effectiveness of U.S. monetary policy since 1960. This paper shows when an operative bank lending channel existed, explains its impact, and evaluates other channels of monetary policy.

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File URL: http://purl.umn.edu/19558
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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19558.

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Date of creation: 2005
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Handle: RePEc:ags:aaea05:19558
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  1. Carlo A. Favero, . "Macroeconomic stability and the preferences of the Fed. A formal analysis, 1961-98," Working Papers 200, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  3. Tevlin, Stacey & Whelan, Karl, 2003. " Explaining the Investment Boom of the 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 1-22, February.
  4. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2002. "Does Local Financial Development Matter?," CEPR Discussion Papers 3307, C.E.P.R. Discussion Papers.
  5. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
  6. Peter N. Ireland, 1999. "Interest Rates, Inflation, and Federal Reserve Policy Since 1980," Boston College Working Papers in Economics 419, Boston College Department of Economics.
  7. Wang, Zijun & Bessler, David A., 2005. "A Monte Carlo Study On The Selection Of Cointegrating Rank Using Information Criteria," Econometric Theory, Cambridge University Press, vol. 21(03), pages 593-620, June.
  8. Titus O. Awokuse & David A. Bessler, 2003. "Vector Autoregressions, Policy Analysis, and Directed Acyclic Graphs: An Application to the U.S. Economy," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 1-24, May.
  9. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 2000. "Identifying the macroeconomic effect of loan supply shocks," Working Papers 00-2, Federal Reserve Bank of Boston.
  10. Stephen J. Perez, 1998. "Causal ordering and 'The bank lending channel'," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(6), pages 613-626.
  11. Hoover, Kevin D., 2005. "Automatic Inference Of The Contemporaneous Causal Order Of A System Of Equations," Econometric Theory, Cambridge University Press, vol. 21(01), pages 69-77, February.
  12. David A. Bessler & Seongpyo Lee, 2002. "Money and prices: U.S. Data 1869-1914 (A study with directed graphs)," Empirical Economics, Springer, vol. 27(3), pages 427-446.
  13. Swanson, N.R. & Granger, C.W.J., 1994. "Impulse Response Functions Based on Causal Approach to Residual Orthogonalization in Vector Autoregressions," Papers 9-94-1, Pennsylvania State - Department of Economics.
  14. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633.
  15. Bessler, David A. & Yang, Jian, 2003. "The structure of interdependence in international stock markets," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 261-287, April.
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