Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance / Anil K. Kashyap, Jeremy C. Stein, David W. Wilcox.

Format:

Book

Author/Creator:

Kashyap, Anil K.

Contributor:

National Bureau of Economic Research.

Stein, Jeremy C.

Wilcox, David W.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4015.

NBER working paper series no. w4015

Language:

English

Subjects (All):

Bank loans.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Monetary Policy and Credit Conditions

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Cambridge, Mass. : National Bureau of Economic Research, 1992.

Summary:

In this paper we use the relative movements in bank loans and commercial paper to provide evidence on the existence of a loan supply channel of monetary policy transmission. A first necessary condition for monetary policy to work through a lending channel is that banks must view loans and securities as imperfect substitutes, so that monetary tightening does affect the availability of bank loans. We find that tighter monetary policy leads to a shift in firms' mix of external financing -- commercial paper issuance rises while bank loans fall, suggesting that loan supply has indeed been reduced. Furthermore, these shifts in the financing mix seem to affect investment (even controlling for interest rates). This implies that bank and non-bank sources of finance are also not perfect substitutes for businesses. We also argue that this view of the transmission mechanism can help explain why interest rate spreads involving commercial paper rates have had considerable predictive power for many measures of economic activity.

Notes:

Print version record

March 1992.

Includes bibliographical references.