The Effect of Monetary Policy on the Availability of Credit: How the Credit Channel Works

36 Pages Posted: 9 Dec 2007 Last revised: 3 Apr 2011

See all articles by Lamont Black

Lamont Black

DePaul University - Driehaus College of Business; Center for Financial Services

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Date Written: March 1, 2011

Abstract

The recent financial turmoil renewed interest in whether monetary policy affects the supply side of the credit market. We show that this credit channel exists — monetary policy affects aggregate loan supply (bank lending channel) and redistributes loan supply across different-sized firms (balance sheet channel). The effect on aggregate loan supply is driven by banks altering loan maturity, so monetary policy takes time to impact loan supply. Policy loosening associated with recessions, including the recent one, increased loan supply after about one year. In the cross-section, the impact is at least as strong for large banks as for small banks.

Keywords: monetary policy, credit channel, bank lending channel, balance sheet channel

JEL Classification: E44, E51, E52, E58, G21

Suggested Citation

Black, Lamont and Rosen, Richard J., The Effect of Monetary Policy on the Availability of Credit: How the Credit Channel Works (March 1, 2011). FRB of Chicago Working Paper No. 2007-13 (revised), Available at SSRN: https://ssrn.com/abstract=1066828 or http://dx.doi.org/10.2139/ssrn.1066828

Lamont Black

DePaul University - Driehaus College of Business ( email )

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312-362-5617 (Phone)
312-362-6566 (Fax)

HOME PAGE: http://driehaus.depaul.edu/faculty-and-staff/faculty/Pages/black-lamont.aspx

Center for Financial Services

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://https://business.depaul.edu/about/centers-institutes/financial-services/Pages/default.aspx

Richard J. Rosen (Contact Author)

Federal Reserve Bank of Chicago - Economic Research ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-6368 (Phone)
312-294-6262 (Fax)

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