Inside the Black Box: The Credit Channel of Monetary Policy Transmission

Ben Bernanke and Mark Gertler

No 5146, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The 'credit channel' theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight- money periods. The resulting increase in the external finance premium--the difference in cost between internal and external funds-- enhances the effects of monetary policy on the real economy. We document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. We discuss two main components of this mechanism, the balance-sheet channel and the bank lending channel. We argue that forecasting exercises using credit aggregates are not valid tests of this theory.

JEL-codes: E44 E51 (search for similar items in EconPapers)
Date: 1995-06
Note: EFG ME
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Citations: View citations in EconPapers (2685)

Published as Journal of Economic Perspectives, Fall 1995, vol. 9, no. 4, pp. 27-48.

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Journal Article: Inside the Black Box: The Credit Channel of Monetary Policy Transmission (1995)
Working Paper: Inside the Black Box: The Credit Channel of Monetary Policy Transmission (1995)
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