The Supply of Credit and U.S. Economic Activity: Empirical Evidence for New Monetary Transmission Mechanisms

Abstract

The consensus that financial intermediaries do not independently affect the real economy existed among macroeconomists during the second half of the twentieth century. Changes in the supply of credit were therefore irrelevant to understanding business cycles. The recent U.S. financial crisis, however, put a spotlight on the independent role financial intermediaries can play in generating and amplifying business cycles. To explore that role further, this dissertation examines empirically whether transmission of shocks to the real economy occurs through changes in the supply of credit and, if so, by which mechanisms, during which periods of time, and under what conditions. To the extent that changes in the supply of credit affect economic activity, results shed light on how to implement monetary policy more effectively going forward.