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

  • Bernanke, Ben
  • Gertler, Mark

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. We document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. We discuss two main components of this mechanism, the balance-sheet channel and the bank lending channel. We argue that forecasting exercises using credit aggregates are not valid tests of this theory.

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File URL: http://econ.as.nyu.edu/docs/IO/9386/RR95-15.pdf
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 95-15.

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Length: 48 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:cvs:starer:95-15
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Order Information: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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  1. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  2. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  3. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
  4. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
  5. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  6. 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.
  7. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, October.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  9. Anil K Kashyap & Jeremy C. Stein, 1994. "The Impact of Monetary Policy on Bank Balance Sheets," NBER Working Papers 4821, National Bureau of Economic Research, Inc.
  10. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  11. Jeremy C. Stein, 1995. "An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," NBER Working Papers 5217, National Bureau of Economic Research, Inc.
  12. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  13. Steven Strongin, 1992. "The identification of monetary policy disturbances: explaining the liquidity puzzle," Working Paper Series, Macroeconomic Issues 92-27, Federal Reserve Bank of Chicago.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
  15. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  16. Anil K. Kashyap & Owen A. Lamont & Jeremy C. Stein, 1993. "Credit conditions and the cyclical behavior of inventories," Working Paper Series, Macroeconomic Issues 93-7, Federal Reserve Bank of Chicago.
  17. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  18. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
  19. Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper 9722, Federal Reserve Bank of New York.
  20. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August.
  21. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  22. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  23. Valerie A. Ramey, 1993. "How Important is the Credit Channel in the Transmission of Monetary Policy?," NBER Working Papers 4285, National Bureau of Economic Research, Inc.
  24. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
  25. R. Glenn Hubbard, 1994. "Is There a `Credit Channel' for Monetary Policy?," NBER Working Papers 4977, National Bureau of Economic Research, Inc.
  26. Bernanke, Ben S., 1993. "How important is the credit channel in the transmission of monetary policy? : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 47-52, December.
  27. John Ryding, 1990. "Housing finance and the transmission of monetary policy," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 42-55.
  28. Stephen D. Oliner & Glenn D. Rudebusch, 1994. "Is there a broad credit channel for monetary policy?," Working Paper Series / Economic Activity Section 146, Board of Governors of the Federal Reserve System (U.S.).
  29. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc.
  30. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(04), pages 918-937, December.
  31. Chah, Eun Young & Ramey, Valerie A & Starr, Ross M, 1995. "Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 272-87, February.
  32. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
  33. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
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  1. Advanced Monetary Theory and Policy (ECON 447)

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