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

DOI Web Site 14 Citations
  • Ben S Bernanke
    Class of 1926 Professor of Economics and Public Affairs, Princeton University, Princeton, New Jersey.
  • Mark Gertler
    Professor of Economics, New York University, New York, New York.

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<jats:p> 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. The authors document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. They discuss two main components of this mechanism, the balance sheet and bank lending channels. The authors argue that forecasting exercises using credit aggregates are not valid tests of this theory. </jats:p>

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