The Effect of Monetary Policy on the Availability of Credit : How the Credit Channel Works

The recent financial turmoil renewed interest in whether monetary policy affects the supply side of the credit market. We show that this credit channel exists mdash; monetary policy affects aggregate loan supply (bank lending channel) and redistributes loan supply across different-sized firms (balance sheet channel). The effect on aggregate loan supply is driven by banks altering loan maturity, so monetary policy takes time to impact loan supply. Policy loosening associated with recessions, including the recent one, increased loan supply after about one year. In the cross-section, the impact is at least as strong for large banks as for small banks