Credit Effects in the Monetary Mechanism

[...]This paper looks for evidence of both types of crediteffects—those that are endogenous to the monetarymechanism and those that are exogenous—using informationon banks’ commercial credit standards as a proxy for bankcredit availability. We compare results from an “off-the-shelf”macroeconomic vector autoregression (VAR) model extendedto include the commercial loan market. Two differentspecifications of the loan market are considered: a classical market with the quantity and price (that is, interest rate) onloans and an augmented market with standards included as aproxy for loan availability.We consider first whether gyrationsin credit standards are important in explaining loan and outputdynamics—that is, do standards “matter” for the macroeconomy?Next, do changes in the stance of monetary policycause lenders to change their standards? In other words, doesmonetary policy work in part through lending standards, orare changes in standards independent of policy? Last andmost generally, is the impact of monetary policy on outputdiminished when we account for the impact of standards?We present three principal findings. First, innovations orunanticipated shocks to standards have a significant impact onboth commercial loans and output. Second, standards are notvery sensitive to changes in monetary policy, at least not thepolicy shocks we identify with shocks to the federal funds rate.Thus, changes in standards appear to be largely exogenous tothe policy process. And third, accounting for standards reducesthe importance of funds rate shocks on output.[...]