Bank Credit Versus Nonbank Credit and the Supply of Liquidity by the Central Bank

  • Milton H. Marquis


Commercial banks provide an important source of financing to firms for working capital expenses. As a consequence, when banks tighten their terms and conditions of business lending, the supply of bank loans to businesses declines and bank loan rates rise. This tightening of bank lending standards cannot be perfectly foreseen and as such represents a “real” shock to the economy. In response, businesses cut back on hiring, as productivity must rise to reflect the higher financing cost. This effect is mitigated to some extent as firms shift their financing away from banks and toward nonbank sources of credit. One such source is the capital market.1


Monetary Policy Central Bank Bank Loan Trade Credit Impulse Response Function 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bernanke, B.S. and A. S. Blinder (1992), The Federal Funds Rate and the Channels of Monetary Transmission, American Economic Review 82, 901–21.Google Scholar
  2. Bernanke, B.S. and M. Gertler (1989), Agency Costs, Net Worth, and Business Fluctuations, American Economic Review 79, 14–31.Google Scholar
  3. Bernanke, B.S. and C.S. Lown (1991), The Credit Crunch, Brookings Papers on Economic Activity 2, 205–247.CrossRefGoogle Scholar
  4. Blanchard, O.J. and N. Kiyotaki (1987), Monopolistic Competition and the Effects of Aggregate Demand, American Economic Review 77, 647–66.Google Scholar
  5. Bolton, P. and X. Freixas (2000), Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium, Journal of Political Economy 108, 324–351.CrossRefGoogle Scholar
  6. Chai, V.V., L.J. C. Christiano and M. Eichenbaum (1995), Inside Money, Outside Money, and Short-Term Interest Rates, Journal of Money, Credit and Banking 27, 1354–1386.CrossRefGoogle Scholar
  7. Christiano, L.J. (1991), Modelling the Liquidity Effect of a Money Shock, Federal Reserve Bank of Minneapolis Quarterly Review 15, 3–34.Google Scholar
  8. Edwards, S. and C.A. Vegh (1997), Banks and Macroeconomic Disturbances under Predetermined Exchange Rates, Journal of Monetary Economics 40, 239–278.CrossRefGoogle Scholar
  9. Einarsson, T. and M.H. Marquis (2000), Bank Intermediation over the Business Cycle, Journal of Money, Credit and Banking (forthcoming).Google Scholar
  10. Gilchrist, S. and E. Zakrajsek (1995), The Importance of Credit for Macroeconomic Activity: Identification Through Heterogeneity, in: J. Peek and E.S. Rosengren (eds.), Is Bank Lending Important for the Transmission of Monetary Policy? ( Federal Reserve Bank of Boston, Boston ) 129–158.Google Scholar
  11. Hartley, P.R. (1998), Inside Money as a Source of Investment Finance, Journal of Money, Credit and Banking 30, 193–217.CrossRefGoogle Scholar
  12. Kashyap, A.K. and J.C. Stein (2000), What Do a Million Banks Have to Say About the Transmission of Monetary Policy?, American Economic Review 90, 407–428.CrossRefGoogle Scholar
  13. Kashyap, A.K., Stein, J.C. and D.W. Wilcox (1993), Monetary Policy and Credit Conditions: Evidence from the Compensation of External Finance, American Economic Review 83, 78–98.Google Scholar
  14. Marquis, M.H. (1999), The Joint and Several Effects of Liquidity Constraints, Financing Constraints, and Financial Intermediation on the Welfare Costs of Inflation, Monetary and Economic Studies 17, Institute for Monetary and Economic Studies, Bank of Japan, 1–20.Google Scholar
  15. Rajan, R.G. (1994), Why Bank Credit Policies Fluctuate: A Theory and Some Evidence, Quarterly Journal of Economics 109, 399–441.CrossRefGoogle Scholar
  16. Oliner, S.D. and G.D. Rudebusch (1995), Is There a Bank Lending Channel for Monetary Policy?, Economic Review 2, Federal Reserve Bank of San Francisco, 3–20.Google Scholar
  17. Shreft, S.L. and R.E. Owens (1991), Survey Evidence of Tighter Credit Conditions: What Does It Mean?, Economic Quarterly 77, Federal Reserve Bank of Richmond, 29–34.Google Scholar
  18. Svensson, Lars E.O. (1986), Sticky Goods Prices, Flexible Assets Prices, Monopolistic Competition, and Monetary Policy, Review of Economic Studies LIII, 385–406.Google Scholar
  19. Weinberg, J.A. (1995), Cycles in Lending Standards?, Economic Quarterly 81, Federal Reserve Bank of Richmond, 1–18.Google Scholar
  20. Williamson, S.D. (1996), Sequential Markets and the Suboptimality of the Friedman Rule, Journal of Monetary Economics 37, 549–572.CrossRefGoogle Scholar
  21. Woodford, M (1996), Loan Commitments and Optimal Monetary Policy, Journal of Monetary Economics 37, 573–605.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2001

Authors and Affiliations

  • Milton H. Marquis
    • 1
  1. 1.Florida State University and the Federal Reserve Bank of San FranciscoUSA

Personalised recommendations