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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Burton A. Abrams & Margaret Z. Clarke & Russell F. Settle, 2003. "Do Banks Matter? A Credit View Model for Small Open Economies," Working Papers 03-13, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:03-13
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    File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2003/UDWP2003-13.pdf
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    References listed on IDEAS

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    5. 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.
    6. Peek, Joe & Rosengren, Eric S & Tootell, Geoffrey M B, 2003. "Identifying the Macroeconomic Effect of Loan Supply Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 931-946, December.
    7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    8. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, December.
    9. 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.
    10. 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.
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    Cited by:

    1. Rondorf, Ulrike, 2012. "Are bank loans important for output growth?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 103-119.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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