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http://ssrn.com/abstract=476153
 
 

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Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance


Anil K. Kashyap


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

David W. Wilcox


Federal Reserve Board - Division of Research and Statistics

Jeremy C. Stein


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

March 1992

NBER Working Paper No. w4015

Abstract:     
In this paper we use the relative movements in bank loans and commercial paper to provide evidence on the existence of a loan supply channel of monetary policy transmission. A first necessary condition for monetary policy to work through a lending channel is that banks must view loans and securities as imperfect substitutes, so that monetary tightening does affect the availability of bank loans. We find that tighter monetary policy leads to a shift in firms' mix of external financing -- commercial paper issuance rises while bank loans fall, suggesting that loan supply has indeed been reduced. Furthermore, these shifts in the financing mix seem to affect investment (even controlling for interest rates). This implies that bank and non-bank sources of finance are also not perfect substitutes for businesses. We also argue that this view of the transmission mechanism can help explain why interest rate spreads involving commercial paper rates have had considerable predictive power for many measures of economic activity.

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Date posted: July 3, 2007  

Suggested Citation

Kashyap, Anil K. and Wilcox, David W. and Stein, Jeremy C., Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance (March 1992). NBER Working Paper No. w4015. Available at SSRN: http://ssrn.com/abstract=476153

Contact Information

Anil K. Kashyap (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)
David W. Wilcox
Federal Reserve Board - Division of Research and Statistics ( email )
20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States
Jeremy C. Stein
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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