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Credit, Financial Conditions, and Monetary Policy Transmission

Author

Listed:
  • David Aikman

    (Bank of England)

  • Andreas Lehnert

    (Federal Reserve Board)

  • Nellie Liang

    (Brookings Institution)

  • Michele Modungno

    (Federal Reserve Board)

Abstract

We show that the effects of financial conditions and monetary policy on U.S. economic performance depend nonlinearly on nonfinancial-sector credit. When credit is below its trend, an impulse to financial conditions leads to improved economic performance and monetary policy transmission works as expected. By contrast, when credit is above trend, a similar impulse leads to an economic expansion in the near term, but then a recession in later quarters. In addition, tighter monetary policy does not lead to tighter financial conditions when credit is above trend and is ineffective at slowing the economy, consistent with evidence of an attenuated transmission of policy changes to distant forward Treasury rates in periods of high credit. These results suggest that credit is an important conditioning variable for the effects of financial variables on macroeconomic performance.

Suggested Citation

  • David Aikman & Andreas Lehnert & Nellie Liang & Michele Modungno, 2020. "Credit, Financial Conditions, and Monetary Policy Transmission," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 141-179, June.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:2:a:4
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    2. Ivan Jaccard, 2024. "Monetary Asymmetries Without (And With) Price Stickiness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 1003-1047, May.
    3. Sapriza, Horacio & Temesvary, Judit, 2024. "Economic activity and the bank credit channel," Journal of Banking & Finance, Elsevier, vol. 164(C).
    4. Yi, Xingjian & Liu, Sheng & Wu, Zhouheng, 2022. "What drives credit expansion worldwide?——An empirical investigation with long-term cross-country panel data," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 225-242.
    5. Anastasios Evgenidis & Anastasios G. Malliaris, 2022. "Monetary policy, financial shocks and economic activity," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 429-456, August.
    6. Wang, Bo & Xiao, Yang, 2023. "The term effect of financial cycle variables on GDP growth," Journal of International Money and Finance, Elsevier, vol. 139(C).
    7. Zhang, Lili & Yang, Dexiang & Guo, Yunfei, 2023. "Dual circulation development model and credit growth," Finance Research Letters, Elsevier, vol. 55(PA).
    8. Mr. Plamen K Iossifov, 2021. "Cyclical Patterns of Systemic Risk Metrics: Cross-Country Analysis," IMF Working Papers 2021/028, International Monetary Fund.
    9. Kirstin Hubrich & Daniel F. Waggoner, 2022. "The transmission of financial shocks and leverage of financial institutions: An endogenous regime switching framework," Finance and Economics Discussion Series 2022-034, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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