TY  - JOUR
AU  - Romer,Christina D.
AU  - Romer,David H.
TI  - Credit Channel or Credit Actions?  An Interpretation of the Postwar Transmission Mechanism
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4485
PY  - 1994
Y2  - June 1994
UR  - http://www.nber.org/papers/w4485
L1  - http://www.nber.org/papers/w4485.pdf
N1  - Author contact info:
Christina D. Romer
Department of Economics
University of California, Berkeley
549 Evans Hall, #3880
Berkeley, CA 94720
Tel: 510/642-4317
Fax: 510/642-6615
E-Mail: cromer@econ.berkeley.edu

David H. Romer
Department of Economics
University of California
Berkeley, CA 94720-3880
E-Mail: dromer@econ.berkeley.edu
M2  - featured in NBER digest on 1994-01-01
AB  - This paper shows that the disproportionate impact of tight monetary policy on banks' ability to lend is largely the consequence of Federal Reserve actions aimed at reducing bank loans directly, rather than an inherent feature of the monetary transmission mechanism.  We provide two types of evidence for this conclusion. First, a detailed examination of nine postwar episodes of contractionary monetary policy shows that while short-term interest rates always rose in response to tight policy, banks typically found ways of maintaining lending despite the falls in reserves.  Banks' ability to lend was particularly affected by tight policy only when the Federal Reserve undertook actions, such as special reserve requirements, moral suasion, or explicit credit controls, to restrain bank lending directly.  Second, simple regressions show that Federal Reserve credit actions have large and significant effects on the composition of external finance between bank loans and commercial paper and on the spread between the prime bank loan rate and the commercial paper rate, and that a bank credit channel of monetary transmission is not needed to explain the movements in these variables in response to tight policy.
ER  -