NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ben S. Bernanke, Mark Gertler

NBER Working Paper No. 5146
Issued in June 1995
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w5146

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

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