Credit Market Imperfections, Financial Crisis and the Transmission of Monetary Policy

This paper uses U.S. macroeconomic data drawn from 2001 to 2010 in order to test for the operation of a credit channel of monetary transmission. Using a combination of a VAR and ADL time series frameworks, evidence is found for the impairment of the credit channel during the crisis period relative to the period which preceded it. Evidence is also found against the presence of a credit crunch during the crisis, and supporting evidence is found for the existence of a credit trap. This analysis indicates a significant role for credit market imperfections in the transmission of monetary policy, and holds policy implications for the potential impact of future monetary expansions conducted in the setting of a financial crisis