The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions

Juan S. Holguín () and Jorge Uribe
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Juan S. Holguín: Universidad del Valle

Empirical Economics, 2020, vol. 59, issue 5, No 16, 2443-2472

Abstract: Abstract We test whether the credit channel of the monetary policy was present in the United States’ economy from January 2001 to April 2016. To this end, we use a factor-augmented vector autoregression, and we impose sensible theoretical sign restrictions in our structural identification scheme. We use the expected substitution effect between bank commercial loans and commercial papers to identify the credit supply channel. We found that the credit channel appears to have operated in the US economy during the sample period. However, when we split the sample, we found that the credit channel did not operate after the subprime crisis (close to the Zero Lower Bound of the interest rate). This result is robust to changing the sign restriction horizons. It supports current views in the literature regarding the ineffectiveness of the credit channel as a means to foster real economic activity during crises episodes.

Keywords: Credit channel; FAVAR; Sign restrictions; Monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E51 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-019-01759-5

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