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Do Banks Matter? A Credit View Model for Small Open Economies

  • Burton A. Abrams


    (Department of Economics, University of Delaware)

  • Margaret Z. Clarke


    (Department of Economics,Pennsylvania State University Berks-Lehigh Valley Campus)

  • Russell F. Settle

    (Western Wshington University)

The Mundell-Fleming model is expanded to include a "credit channel" by adding a market for bank loans. In contrast to the predictions of the traditional Mundell-Fleming model, asset shifts in bank portfolios between bonds and bank loans produce aggregate demand effects in our credit-channel model. We test this hypothesis with an empirical growth model estimated with data from small open economies: the U.S. states. The evidence supports our "credit view" model's prediction that variations in bank lending decisions can produce economically significant fluctuations in aggregate demand, and may initiate or amplify economic contractions and expansions.

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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-13.

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Length: 28 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dlw:wpaper:03-13
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  1. Burton A. Abrams & Margaret Z. Clarke & Russell F. Settle, 1999. "The Impact of Banking and Fiscal Policies on State-Level Economic Growth," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 367-378, October.
  2. PEEK Joe & M.B. TOOTELL Geoffrey & ROSENGREN Eric S., . "Identifying the Macroeconomic Effect of Loan Supply Shocks," EcoMod2003 330700118, EcoMod.
  3. Robert J. Barro, 1996. "Determinants of Economic Growth: A Cross-Country Empirical Study," NBER Working Papers 5698, National Bureau of Economic Research, Inc.
  4. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
  5. Warner, Elizabeth J & Georges, Christophre, 2001. "The Credit Channel of Monetary Policy Transmission: Evidence from Stock Returns," Economic Inquiry, Western Economic Association International, vol. 39(1), pages 74-85, January.
  6. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  7. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  8. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  9. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  10. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, December.
  11. Gerald A. Carlino & Robert H. DeFina, 1997. "The differential regional effects of monetary policy: evidence from the U.S. States," Working Papers 97-12, Federal Reserve Bank of Philadelphia.
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