The credit supply channel of monetary policy: evidence from a FAVAR model with sign restrictions

  • Juan S. Holguín
  • Jorge M. UribeEmail author


We test whether the credit channel of the monetary policy was present in the United States’ economy from January 2001 to April 2016. To this end, we use a factor-augmented vector autoregression, and we impose sensible theoretical sign restrictions in our structural identification scheme. We use the expected substitution effect between bank commercial loans and commercial papers to identify the credit supply channel. We found that the credit channel appears to have operated in the US economy during the sample period. However, when we split the sample, we found that the credit channel did not operate after the subprime crisis (close to the Zero Lower Bound of the interest rate). This result is robust to changing the sign restriction horizons. It supports current views in the literature regarding the ineffectiveness of the credit channel as a means to foster real economic activity during crises episodes.


Credit channel FAVAR Sign restrictions Monetary policy 

JEL Classification

E51 E52 C32 



  1. Adams-Kane J, Jia Y, Lim J (2015) Global transmission channels for international bank lending in the 2007–09 financial crisis. J Intern Money Financ 56:97–113CrossRefGoogle Scholar
  2. Apergis N, Christou C (2015) The behaviour of the bank lending channel when interest rates approach the zero-lower bound: evidence from quantile regressions. Econ Model 49:296–307CrossRefGoogle Scholar
  3. Bai J, Ng S (2002) Determining the number of factors in approximate factor models. Econometrica 70:191–221CrossRefGoogle Scholar
  4. Belviso F, Milani F (2006) Structural factor-augmented VARs (SFAVARs) and the effects of monetary policy. Top Macroecon 6(2):1–46Google Scholar
  5. Bernanke B, Blinder A (1988) Credit, money, and aggregate demand. Am Econ Rev 78:435–439Google Scholar
  6. Bernanke B, Blinder A (1992) The Federal funds rate and the channels of monetary transmission. Am Econ Rev 82:901–921Google Scholar
  7. Bernanke B, Gertler M (1995) Inside the black box. J Econ Perspect 9:27–48CrossRefGoogle Scholar
  8. Bernanke B, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. Quart J Econ 120:387–422Google Scholar
  9. Boivin J, Kiley M, Mishkin F (2010) How has the monetary transmission mechanism evolved over time? In: Friedman B, Woodford M (eds) Handbook of monetary economics, vol 3. Elsevier, Amsterdam, pp 369–422CrossRefGoogle Scholar
  10. Bordo M, Duca J, Koch C (2016) Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades. J Financ Stab 26:90–106. CrossRefGoogle Scholar
  11. Canova F, De Nicolo G (2002) Monetary disturbances matter for business fluctuations in the G-7. J Mon Econ 49:1131–1159CrossRefGoogle Scholar
  12. D’Amico S, Farka M (2011) The fed and the stock market: an identification based on intraday futures data. J Bus Econ Stat 29(1):126–137CrossRefGoogle Scholar
  13. Dave C, Dressler S, Zhang L (2013) The bank lending channel: a FAVAR analysis. J Money Credit Bank 45:1705–1720CrossRefGoogle Scholar
  14. Eickmeier S, Lemke W, Marcellino M (2015) Classical time varying factor-augmented vector auto-regressive models-estimation, forecasting and structural analysis. J R Stat Soc Ser A Stat Soc 178:493–533CrossRefGoogle Scholar
  15. Ellis C, Mumtaz H, Zabczyk P (2014) What lies beneath? A time-varying FAVAR model for the UK transmission mechanism. Econ J 124:668–699CrossRefGoogle Scholar
  16. Endut N, Morley J, Tien P-L (2017) The changing transmission mechanism of US monetary policy. Empir Econ. Google Scholar
  17. Faust J (1998) The robustness of identified VAR conclusions about money. Carnegie-Rochester Ser Public Policy 49:207–244CrossRefGoogle Scholar
  18. Fry R, Pagan A (2011) Sign restrictions in structural vector autoregressions: a critical review. J Econ Lit 49(4):938–960CrossRefGoogle Scholar
  19. Galí J (2015) Monetary policy, inflation and the business cycle: an introduction to the New Keyensian framework and its applications. Princeton University Press, PrincetonGoogle Scholar
  20. Hicks J (1937) Mr. Keynes and the “Classics”; a suggested interpretation. Econometrica 5:147–159CrossRefGoogle Scholar
  21. Jimborean R, Méesonnier J (2010) Bank’s financial conditions and the transmission of monetary policy a FAVAR approach. Intern J Cent Bank 6:71–117Google Scholar
  22. Jorgenson D (1963) Capital theory and investment behavior. Am Econ Rev 53:247–259Google Scholar
  23. Kashyap A, Stein J (1995) The impact of monetary policy on bank balance sheets. Carnegie-Rochester Conf Ser Public Policy 42:151–195CrossRefGoogle Scholar
  24. Kashyap A, Stein J, Wilcox D (1993) Monetary policy and credit conditions: evidence from the composition of external finance. Am Econ Rev 83:78–98Google Scholar
  25. Keating J, Kelly L, Valcarcel J (2014) Solving the price puzzle with an alternative indicator of monetary policy. Econ Lett 124(2):188–194CrossRefGoogle Scholar
  26. Kwan S (2010). Financial crisis and bank lending. Fed Reserv Bank of San Franc, Working Paper No. 2010–11Google Scholar
  27. Lütkepohl H (2006) New introduction to multiple time series analysis. Springer, BerlinGoogle Scholar
  28. Mundell R (1963) Capital mobility and stabilization policy under fixed and flexible exchange rates. Can J Econ Political Sci 29:475–485CrossRefGoogle Scholar
  29. Munir K, Qayyum A (2014) Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach. Empir Econ 46(3):843–864CrossRefGoogle Scholar
  30. Obstfeld M, Rogoff K (1995) The mirage of fixed exchange rates. J Econ Perspect 9:73–96CrossRefGoogle Scholar
  31. Olmo J, Sanso-Navarro M (2015) Changes in the transmission of monetary policy during crisis episodes: evidence from the euro area and the U.S. Econ Model 48:155–166CrossRefGoogle Scholar
  32. Peek J, Rosengren E (2012) The role of banks in the transmission of monetary policy. In: Allen B, Molyneux P, Wilson J (eds) The Oxford Handbook of Banking. Oxford University Press, OxfordGoogle Scholar
  33. Sims C (1980) Macroeconomics and reality. Econometrica 48(1):1–48CrossRefGoogle Scholar
  34. Stock J, Watson M (2012) Disentangling the channels of the 2007–09 recession. Brook Pap Econ Act 44:81–135CrossRefGoogle Scholar
  35. Swanson E, Williams J (2014) Measuring the effect of the zero lower bound on medium- and longer-term interest rates. Am Econ Rev 104:3154–3185CrossRefGoogle Scholar
  36. Tobin J (1969) A general equilibrium approach to monetary theory. J Money Credit Bank 1:15–29CrossRefGoogle Scholar
  37. Uhlig H (2005) What are the effects of monetary policy on output? results from an agnostic identification procedure. J Monet Econ 52:381–419CrossRefGoogle Scholar
  38. Vera D (2012) How responsive are banks to monetary policy? Appl Econ 44:2335–2346CrossRefGoogle Scholar
  39. Woodford M (2003) Interest and prices: foundations of a theory of monetary policy. Princeton University Press, PrincetonGoogle Scholar
  40. Xia F, Wu C (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. J Money Credit Bank 48(2–3):253–291Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversidad del ValleCaliColombia
  2. 2.Department of Economics and Business StudiesOpen University of CataloniaBarcelonaSpain
  3. 3.RiskcenterUniversity of BarcelonaBarcelonaSpain

Personalised recommendations