Was There Ever a Lending Channel?
21 Pages Posted: 20 Dec 2012 Last revised: 16 Apr 2015
Date Written: July 21, 2013
The lending channel model posits that control of deposits that have reserve requirements allows the Fed to constrain the financing of the illiquid loans to businesses and consumers that are the comparative advantage of banks and their link to real activity. The constraint works because banks do not use traded liquid assets and liabilities with no reserve requirements to offset the effects of variation in deposits on loans. The results presented here are more consistent with a simple alternative model in which profit-maximizing banks vary traded assets and liabilities with and without reserve requirements to exercise profit opportunities in loans and so shield them from the Fed.
JEL Classification: E50
Suggested Citation: Suggested Citation