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

  • Ben S. Bernanke
  • Mark Gertler

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5146.

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Date of creation: Jun 1995
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Publication status: published as Journal of Economic Perspectives, Fall 1995, vol. 9, no. 4, pp. 27-48.
Handle: RePEc:nbr:nberwo:5146
Note: EFG ME
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  1. Kashyap, Anil K & Lamont, Owen A & Stein, Jeremy C, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 565-92, August.
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  3. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
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  8. 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.
  9. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
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  14. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University.
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  18. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  19. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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  28. John Ryding, 1990. "Housing finance and the transmission of monetary policy," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 42-55.
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  33. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
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