In Search of the "Bank Lending Channel": Causality Analysis for the Transmission Mechanism of U.S. Monetary Policy
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The bank lending channel states that changes in monetary policy cause changes in bank loans thus causing changes in real income. This implies the Federal Reserve can influence real income by controlling the level of intermediated loans. We apply a new method to test for an operative bank lending channel in the transmission mechanism of monetary policy. Combining an error correction model with directed acyclic graphs, we explore the existence of a bank lending channel and the effectiveness of U.S. monetary policy since 1960. This paper shows when an operative bank lending channel existed, explains its impact, and evaluates other channels of monetary policy.