Credit Channels and Consumption in Europe: Empirical Evidence
30 Pages Posted: 13 Dec 2005
Date Written: June 1999
This paper studies the macroeconomic relevance of credit channels of monetary policy by examining the impact of the external finance premium (EFP), that may vary over the business cycle, on private consumption in Europe. A consumption model incorporates credit channels by assuming that liquidity-constrained consumers not only use current income for financing their consumption, but also external finance, which availability depends on the EFP. The empirical analysis shows an accelerator effect of the EFP on consumption for Germany, Italy and the Netherlands. In contrast, for France, the United Kingdom and Belgium no evidence in favour of this financial propagation mechanism has been found.
Keywords: credit channels, consumption, external finance premium, EU member states
JEL Classification: C22, E21, E52
Suggested Citation: Suggested Citation