Credit channel
Open-knowledge reference entry
The credit channel mechanism of monetary policy describes the theory that a central bank's policy changes affect the amount of credit that banks issue to firms and consumers for purchases, which in turn affects the real economy.
Credit channel versus conventional monetary policy transmission mechanisms
Monetary policy transmission mechanisms describe how policy decisions are translated into effects on the real economy. Conventional monetary policy transmission mechanisms, such as the interest rate channel, focus on direct effects of monetary policy actions. The interest rate channel, for example, suggests that monetary policy makers use their leverage over nominal, short-term interest rates, such as the federal funds rate, to influence the cost of capital, and subsequently, purchases of durable goods and firm investment. Because prices are assumed to be sticky in the short-run, short-term interest rate changes affect the real interest rate. Changes in the real interest rate influence firm investment and household spending decisions on durable goods. These changes in investment and durable good purchases affect the level of aggregate demand and final production.
By contrast, the credit channel of monetary policy transmission is an indirect amplification mechanism that works in tandem with the interest rate channel. The credit channel affects the economy by altering the amount of credit firms and/or households have access to in equilibrium. Factors that reduce the availability of credit reduce agents' spending and investment, which leads to a reduction in output.
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This entry incorporates text from “Credit channel” on English Wikipedia. Contributors are listed in the page history. Text is available under the Creative Commons Attribution-ShareAlike 4.0 License. Selected authority identifiers and statements are retrieved from Wikidata under CC0; their references and qualifiers remain part of the verification path.