The credit card and small business lending channels of monetary policy

Maximillian Littlejohn

Journal of Economic Dynamics and Control, 2025, vol. 171, issue C

Abstract: This paper analyzes the lending channel of monetary policy exclusively through credit card and small business bank loans. A time-varying parameter vector autoregression is estimated, providing evidence that the direction and strength in which credit card and small business loans respond to monetary policy are time-dependent. To investigate these findings analytically, I develop a general equilibrium model of consumer credit card and small business lending. Households and firms use a combination of monetary assets and bank loans to finance random consumption and investment opportunities. In accordance with conventional theory, when borrowers are sufficiently constrained, a monetary tightening reduces lending through the balance sheet subchannel of monetary policy. However, when borrowers are less constrained, a monetary tightening raises unsecured debt limits through a second subchannel and lending expands. This second subchannel, operating solely through unsecured credit, offers a new theory to justify an expansionary loan response to tightened monetary policy that the traditional lending channel literature has yet to address.

Keywords: Bank lending; Credit cards; Small business finance; Limited commitment; Monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E41 E51 E52 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:171:y:2025:i:c:s0165188925000119

DOI: 10.1016/j.jedc.2025.105045

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