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Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view of fragmented monetary policy and changing policy objectives among the national cen-tral banks in the euro area. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with inflation in the respective countries.

The transmission mechanism of monetary policy has received extensive treatment in the macroeconomic literature. Most models currently used for macroeconomic analysis exclude money or else model money demand as entirely endogenous. Nevertheless, academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans to document that the mechanism does not work through the standard multiplier model or the bank lending channel. Our analysis, however, does not reflect on the existence of a broader credit channel.

Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real wages and profits. Moreover, the lack in these models of an explicit role of the credit market in the transmission mechanism is now regarded as a major limitation. Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the "credit-cost channel" of monetary policy. The thrust of the model is that firms' reliance on bank loans ("credit channel") may make aggregate supply sensitive to bank interest rates ("cost channel"), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed relationships, with no recourse to non-competitive hypotheses and frictions. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate.

The paper empirically investigates the monetary transmission mechanism in the Baltic States. The analysis of the transmission channels through which monetary policy shocks are transmitted is particularly important for the European Central Bank that makes monetary policy in an enlarged European Monetary Union. The paper focuses on the bank lending channel of monetary transmission due to the importance of banks in the financial system of the Baltic countries. The existence of this transmission channel is tested by using a panel structural approach that distinguishes banks according to size, capitalization, liquidity and ownership structure. The results indicate that a bank lending channel is present in the Baltic States and mainly caused by differences in liquidity.

This paper addresses the credit channel in Germany by using aggregate data. We present a stylized model of the banking firm, in which banks decide on their loan supply in the light of uncertainty about the future course of monetary policy. Applying a vector error correction model (VECM), we estimate the response of bank loans after a monetary policy shock in consideration of the reaction of the output level and the loan rate. We estimate our model to characterize the response of bank loans by matching the theoretical impulse responses with the empirical impulse responses to a monetary policy shock. Evidence in support of the credit channel can be reported.

In this paper, we address the existence of the credit channel in the transmission of monetary policy in Germany by means of a structural analysis of aggregate bank loan data. The analysis is based on a stylized model of the banking firm that characterizes the loan supply decisions of banks when monetary policy is implemented through an interest rate targeting. Using the model as a guide, we apply a vector error correction (VECM) suggested by Johansen (1988) that allows to derive long-run loan supply and loan demand relationships by imposing restrictions on cointegration vectors. The short-run dynamics of the VECM is investigated on the basis of impulse response analysis, which sets out the impact of a monetary policy shock on the variables in the system. Empirical evidence in support of the credit channel can be reported.

The legal environment, the structure of the financial system as well as the concentration of corporate ownership and the development of the capital market suggest for Austria a high effectiveness of the monetary policy with a strong impact of the lending channel. This supposition was verified combining three supplementary empirical methods: Granger causality between the velocities of money and loans and the real output; impulse-response functions for VECs with the subsequently opened/closed money/credit channels; the predictive power of money and loan variables for a production forecast. Both various types of loans and the total volume of credits for separate banking groups were examined. The Austrian output showed to be highly sensitive to monetary policy innovations; both the money and the credit channel were significant. The dependence of Austrian firms on credits rather than on other financial resources was more pronounced for credits in domestic currency, mortgage loans and municipal notes.

In order to obtain a better understanding of monetary transmission, this paper assesses the importance of the interest rate and credit channels on business fixed investment in the German manufacturing sector. Our panel of financial statements contains 44,345 observations for 6,408 firms. We uncover a rather solid interest channel. A transitory increase in nominal interest rates by 100 basis points would depress investment demand by almost 4% within the first year. Using our direct measure of creditworthiness, we can also document a balance-sheet channel. Relative to unconstrained firms, financially constrained firms exhibit increased sensitivity to internal funds, and decreased sensitivity to the user cost as well as to market demand. Furthermore, changes in the rating of firms seem to affect investment demand in a way that is consistent with the presence of a balance-sheet channel. Quantitatively, however, this balance-sheet channel seems to be of secondary importance. Mit Hinblick auf ein besseres Verständnis der monetären Transmission wird hier die Bedeutung des Zinskanals und des Kreditkanals für die Anlageinvestitionen des Verarbeitenden Gewerbes in Deutschland untersucht. Unser Panel von Jahresabschlüssen enthält 44 345 Beobachtungen aus 6 408 Unternehmen. Es kann ein recht kräftiger Zinskanal isoliert werden. Eine transitorische Erhöhung der Nominalzinsen um 100 Basispunkte könnte die Investitionsnachfrage im Laufe eines Jahres um fast 4% drücken. Mit Hilfe eines direkten Maßes für Kreditwürdigkeit können wir außerdem einen Unternehmensbilanzkanal nachweisen. Im Vergleich zu anderen Firmen weisen finanziell beschränkte Unternehmen eine erhöhte Sensitivität für interne Liquidität auf, sowie eine geringere Reagibilität bezüglich der Kapitalnutzungskosten und der Nachfrage. Weiterhin paßt die Wirkung einer Änderung des Unternehmensratings auf die Investitionsnachfrage zu einem wirksamen Unternehmensbilanzkanal. Jedoch scheint letzterer quantitativ von nachgeordneter Bedeutung zu sein.

This paper investigates the credit channel in Germany and the United Kingdom. The financial systems of these two countries show substantial structural differences, which leads one to expect that their real sectors respond differently to changes in monetary policy. To the extent that this is the case, the UK's eventual accession to EMU could have non-trivial consequences. However, based on unrestricted VAR models, various interest rate shocks are simulated and it is found that the differences in the transmission effects are relatively small. While the importance of possible identification problems is stressed, the paper hypothesizes that the introduction of a common currency is likely to deepen capital markets and raise competition among credit intermediaries, resulting in a declining dependence on banks in Germany.