How the credit channel works: differentiating the bank lending channel and the balance sheet channel

Lamont K. Black and Richard Rosen

No WP-07-13, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: The credit channel of monetary policy transmission operates through changes in lending. To examine this channel, we explore how movements in the real federal funds rate affect bank lending. Using data on individual loans from the Survey of Terms of Bank Lending, we are able to differentiate two ways the credit channel can work: by affecting overall bank lending (the bank lending channel) and by affecting the allocation of loans (the balance sheet channel). We find evidence consistent with the operation of both internal credit channels. During periods of tight monetary policy, banks adjust their stock of loans by reducing the maturity of loan originations and they reallocate their short-term loan supply from small firms to large firms. These results are stronger for large banks than for small banks.

Keywords: Monetary policy; Bank loans (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (8)

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