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Journal of Economic Perspectives: Vol. 9 No. 4 (Fall 1995)

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Inside the Black Box: The Credit Channel of Monetary Policy Transmission

Article Citation

Bernanke, Ben S., and Mark Gertler. 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission." Journal of Economic Perspectives, 9(4): 27-48.

DOI: 10.1257/jep.9.4.27

Abstract

The 'credit channel' theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight-money periods. The resulting increase in the external finance premium--the difference in cost between internal and external funds--enhances the effects of monetary policy on the real economy. The authors document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. They discuss two main components of this mechanism, the balance sheet and bank lending channels. The authors argue that forecasting exercises using credit aggregates are not valid tests of this theory.

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Authors

Bernanke, Ben S. (Princeton U)
Gertler, Mark (NYU)

JEL Classifications

E52: Monetary Policy

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