Historical Perspectives on the Monetary Transmission Mechanism

61 Pages Posted: 26 May 2004

See all articles by Jeffrey A. Miron

Jeffrey A. Miron

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

Christina D. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

David N. Weil

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

Date Written: April 1993

Abstract

This paper examines changes over time in the importance of the lending channel in the transmission of monetary shocks to the real economy. We first use a simple extension of the Bernanke-Blinder model to isolate the observable factors that affect the strength of the lending channel. We then show that based on changes in the structure of banks assets, reserve requirements, and the composition of external firm finance, the lending channel should have been stronger before 1929 than during the post-World War II period, especially the first half of this period. Finally, we demonstrate that conventional indicators of the importance of the lending channel, such as the spread between the loan rate and the bond rate and the correlation between loans and output, do not show the predicted decline in the importance of lending over time. From this we conclude that either the traditional indicators are not useful measures of the strength of the lending channel or that the lending channel has not been quantitatively important in any era.

Suggested Citation

Miron, Jeffrey A. and Romer, Christina D. and Weil, David Nathan, Historical Perspectives on the Monetary Transmission Mechanism (April 1993). NBER Working Paper No. w4326. Available at SSRN: https://ssrn.com/abstract=227013

Jeffrey A. Miron (Contact Author)

Harvard University - Department of Economics ( email )

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Christina D. Romer

University of California, Berkeley - Department of Economics ( email )

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David Nathan Weil

Brown University - Department of Economics ( email )

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401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

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