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Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance

Anil K. Kashyap, Jeremy C. Stein and David W. Wilcox
The American Economic Review
Vol. 83, No. 1 (Mar., 1993), pp. 78-98
Stable URL: http://www.jstor.org/stable/2117497
Page Count: 21
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Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance
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Abstract

In this paper, we use the relative moments in bank loans and commercial paper to provide evidence on the existence of a loan-supply channel of monetary-policy transmission. We find that tighter monetary policy leads to a shift in firms' mix of external financing: commercial paper issuance rises while bank loans fall. This suggests that contractionary policy can indeed reduce loan supply. Furthermore, such shifts in loan supply seem to affect investment, even controlling for interest rates and output.

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