Do Banks Matter? A Credit View Model for Small Open Economies

Burton Abrams, Margaret Z. Clarke () and Russell F. Settle
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Margaret Z. Clarke: Department of Economics,Pennsylvania State University Berks-Lehigh Valley Campus
Russell F. Settle: Western Wshington University

No 03-13, Working Papers from University of Delaware, Department of Economics

Abstract: The Mundell-Fleming model is expanded to include a "credit channel" by adding a market for bank loans. In contrast to the predictions of the traditional Mundell-Fleming model, asset shifts in bank portfolios between bonds and bank loans produce aggregate demand effects in our credit-channel model. We test this hypothesis with an empirical growth model estimated with data from small open economies: the U.S. states. The evidence supports our "credit view" model's prediction that variations in bank lending decisions can produce economically significant fluctuations in aggregate demand, and may initiate or amplify economic contractions and expansions.

Keywords: Bank Lending; Credit; Credit Channel; Economic Growth (search for similar items in EconPapers)
JEL-codes: E32 E51 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2003
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Citations: View citations in EconPapers (1)

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