Credit Rationing and the Monetary Transmission Mechanism
Abstract
According to Alan Blinder's (1987) model of credit rationing, tightening of monetary policy may have strong effects on the real sector when credit is already tight but weak effects when credit is initially plentiful (p. 343). The tighter the state of recent monetary policy, the more likely it is that the economy's credit constraint will be binding, and hence the greater will be the output effects of monetary policy. This paper provides a test of the Blinder proposition using postwar quarterly U.S. data, and the results are then used to estimate the importance of credit rationing as a channel through which monetary policy influences the economy. I consider three alternative criteria for determining when the economy is creditrationed. The first criterion states that the economy is credit-rationed if recent monetary policy (as measured by one of two alternative monetary variables) has been substantially tighter than average. The second method draws on work by Otto Eckstein (1983) and Allen Sinai (1976) who developed estimates of periods of credit crunch based on a wide variety of indicators of credit market conditions. The third and final approach is based on Stephen King's (1986) estimates of the excess demand for commercial bank lending. Section I develops the specification of the tests, Section II reports regressions and analyzes the implications for the monetary transmission mechanism, and Section III presents conclusions.
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