Working Paper: NBER ID: w16200
Authors: Efraim Benmelech; Nittai K. Bergman
Abstract: This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term 'credit traps' to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.
Keywords: No keywords provided
JEL Codes: E44; E51; E58; G01; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Easing of monetary policy (E52) | Increased lending (G21) |
| Easing of monetary policy (E52) | Higher collateral values (G32) |
| Higher collateral values (G32) | Greater liquidity in the corporate sector (G39) |
| Increased collateral values (G19) | Reduced financial frictions (G19) |
| Reduced financial frictions (G19) | Facilitating more lending (G21) |
| Monetary easing beyond a threshold (E49) | No increase in lending (G21) |
| Monetary easing beyond a threshold (E49) | Banks hoarding liquidity (G21) |
| Small contractions in monetary policy (E52) | Significant declines in lending (G21) |
| Small contractions in monetary policy (E52) | Significant declines in collateral values (G33) |
| Aggressive liquidity injections (E52) | Increased lending (G21) |
| Aggressive liquidity injections (E52) | Higher collateral values (G32) |
| Higher collateral values (G32) | Restoring the feedback loop (E61) |