The credit channel of monetary policy: direct survey evidence from UK firms

Krishan Shah, Phillip Bunn and Jonathan Haskel ()
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Krishan Shah: Bank of England
Phillip Bunn: Bank of England

No 1138, Bank of England Staff Working Paper series from Bank of England

Abstract: This paper investigates the role of the credit channel of monetary policy transmission in the 2022–23 tightening cycle in the UK. Using novel firm survey data, we validate three predictions of a simple model of the credit channel: firstly, firms using external finance report a higher cost of capital than those using internal funds; secondly that firms using external finance see a larger rise in their cost of borrowing for a given increase in the policy interest rate than those using internal funds; and finally that firms reliant on external financing for investment report reducing investment by more than the internally funded firms when baseline interest rates rise. Our results suggest that credit channel effects may account for up to a quarter of the total impact that monetary policy has on investment.

Keywords: Credit channel; monetary policy; firms; investment; survey data. (search for similar items in EconPapers)
JEL-codes: D22 D25 E22 E52 (search for similar items in EconPapers)
Pages: 34
Date: 2025-07-25
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023260

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