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The credit channel of monetary policy: direct survey evidence from UK firms

Author

Listed:
  • Krishan Shah

    (Bank of England)

  • Phillip Bunn

    (Bank of England)

  • Jonathan Haskel

    (Imperial College Business School, London)

Abstract

This paper investigates the role of the credit channel of monetary policy transmission in the 2022–23 tightening cycle in the UK. Using novel firm survey data, we validate three predictions of a simple model of the credit channel: firstly, firms using external finance report a higher cost of capital than those using internal funds; secondly that firms using external finance see a larger rise in their cost of borrowing for a given increase in the policy interest rate than those using internal funds; and finally that firms reliant on external financing for investment report reducing investment by more than the internally funded firms when baseline interest rates rise. Our results suggest that credit channel effects may account for up to a quarter of the total impact that monetary policy has on investment.

Suggested Citation

  • Krishan Shah & Phillip Bunn & Jonathan Haskel, 2025. "The credit channel of monetary policy: direct survey evidence from UK firms," Bank of England Staff Working Paper series 1138, Bank of England.
    • Handle: RePEc:boe:boeewp:023260
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/the-credit-channel-of-monetary-policy-direct-survey-evidence-from-uk-firms.pdf
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    Keywords

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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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