Working Paper: NBER ID: w4326
Authors: Jeffrey A. Miron; Christina D. Romer; David N. Weil
Abstract: This paper examines changes over time in the importance of the lending channel in the transmission of monetary shocks to the real economy. We first use a simple extension of the Bernanke-Blinder model to isolate the observable factors that affect the strength of the lending channel. We then show that based on changes in the structure of banks assets, reserve requirements, and the composition of external firm finance, the lending channel should have been stronger before 1929 than during the post-World War II period, especially the first half of this period. Finally, we demonstrate that conventional indicators of the importance of the lending channel, such as the spread between the loan rate and the bond rate and the correlation between loans and output, do not show the predicted decline in the importance of lending over time. From this we conclude that either the traditional indicators are not useful measures of the strength of the lending channel or that the lending channel has not been quantitatively important in any era.
Keywords: Monetary Transmission Mechanism; Lending Channel; Historical Analysis
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lending channel strength before 1929 (F65) | lending channel strength post-World War II (F65) |
| reserve requirements (E58) | lending channel strength (E51) |
| composition of firm financing (G32) | lending channel strength (E51) |
| monetary contractions (E42) | bank lending (G21) |
| bank lending (G21) | economic output (E23) |