The Credit Channel and its Functions in Transmitting Monetary Policy Decisions

Abstract

The paper aims at providing a consistent analysis of how the credit channel within the monetary policy transmission mechanism functions, more precisely how the central banks’ monetary policy decisions are being delivered throughout the economy by credit related mechanisms towards final macroeconomic variables such as inflation, unemployment, or the levels of investments, production and consumption. For this purpose, we will de-construct the credit channel and take a close look at its main two components, the bank lending sub-channel and the balance sheet sub-channel, in the attempt of getting a better understanding of the cause-effect processes that take place within them, with the ultimate purpose of providing central banks with insight that would help decide on the intensity of its monetary interventions and contribute to making more effective and efficient monetary policy decisions.
Keywords: Central banking, Credit channel, Monetary policy, Monetary policy transmission mechanism.