TY - JOUR
T1 - The channel of monetary transmission to demand
T2 - Evidence from the market for automobile credit
AU - Ludvigson, Sydney
PY - 1998/8
Y1 - 1998/8
N2 - In response to tight money, both consumer loans and consumption fall. I ask whether there is any causality running from loans to consumption by focussing on how the composition of automobile finance between bank and nonbank sources of credit changes in response to unanticipated innovations in monetary policy. The results indicate that contractionary monetary policy produces a statistically significant reduction in the relative supply of bank consumer loans, which in turn produces a decline in real consumption. The evidence therefore supports the existence of a credit channel of monetary transmission to aggregate consumption. Moreover, the nature of automobile finance is uniquely suited to identifying which of two possible subchannels of the broader credit channel is relatively more important, and suggests the results are more likely consistent with a bank lending channel than with a pure balance sheet channel. However, the findings also indicate that the quantitative effects of the lending channel on the aggregate economy, though precisely estimated, may be quite small.
AB - In response to tight money, both consumer loans and consumption fall. I ask whether there is any causality running from loans to consumption by focussing on how the composition of automobile finance between bank and nonbank sources of credit changes in response to unanticipated innovations in monetary policy. The results indicate that contractionary monetary policy produces a statistically significant reduction in the relative supply of bank consumer loans, which in turn produces a decline in real consumption. The evidence therefore supports the existence of a credit channel of monetary transmission to aggregate consumption. Moreover, the nature of automobile finance is uniquely suited to identifying which of two possible subchannels of the broader credit channel is relatively more important, and suggests the results are more likely consistent with a bank lending channel than with a pure balance sheet channel. However, the findings also indicate that the quantitative effects of the lending channel on the aggregate economy, though precisely estimated, may be quite small.
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U2 - 10.2307/2601106
DO - 10.2307/2601106
M3 - Article
AN - SCOPUS:0038898469
SN - 0022-2879
VL - 30
SP - 365
EP - 383
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
IS - 3
ER -