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Do Banks Matter? A Credit View Model for Small Open Economies

Author

Listed:
  • Burton A. Abrams

    (Department of Economics, University of Delaware)

  • Margaret Z. Clarke

    (Department of Economics,Pennsylvania State University Berks-Lehigh Valley Campus)

  • Russell F. Settle

    (Western Wshington University)

Abstract

The Mundell-Fleming model is expanded to include a "credit channel" by adding a market for bank loans. In contrast to the predictions of the traditional Mundell-Fleming model, asset shifts in bank portfolios between bonds and bank loans produce aggregate demand effects in our credit-channel model. We test this hypothesis with an empirical growth model estimated with data from small open economies: the U.S. states. The evidence supports our "credit view" model's prediction that variations in bank lending decisions can produce economically significant fluctuations in aggregate demand, and may initiate or amplify economic contractions and expansions.

Suggested Citation

  • Burton A. Abrams & Margaret Z. Clarke & Russell F. Settle, 2003. "Do Banks Matter? A Credit View Model for Small Open Economies," Working Papers 03-13, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:03-13
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    References listed on IDEAS

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    7. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
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    12. Warner, Elizabeth J & Georges, Christophre, 2001. "The Credit Channel of Monetary Policy Transmission: Evidence from Stock Returns," Economic Inquiry, Western Economic Association International, vol. 39(1), pages 74-85, January.
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    Cited by:

    1. Rondorf, Ulrike, 2012. "Are bank loans important for output growth?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 103-119.

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    More about this item

    Keywords

    Bank Lending; Credit; Credit Channel; Economic Growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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