The channel of monetary transmission to demand: evidence from the market for automobile credit

In response to tight money, both consumer loans and consumption fall. In this paper, I ask whether there is any causality running from loans to consumption by focusing on hw the composition of automobile finance between bank and nonbank sources of credit changes in response to unanticipated innovations in monetary policy. The results indicate that contractionary monetary policy reduces the supply of bank consumer loans, which in turn produces a decline in real consumption. The evidence is therefore supportive of a credit channel theory of monetary transmission to aggregate consumption. Furthermore, the nature of automobile finance is uniquely suited to identifying which of two possible sub-channels is relatively more important, and suggests the results are more likely consistent with a bank lending channel than with a pure balance sheet channel.