Credit rationing and endogenous monetary policy

Abstract

The implication of credit rationing models states that the effect of monetary policy on output may be stronger when credit conditions are tight than when they are loose. Therefore, there may be a threshold effect on the relation between real money supply and output. Existing empirical studies on testing threshold effects ignore the fact that the monetary policy which follows optimal rules is endogenous. This article provides a test of threshold effects when monetary policy is endogenous and finds that the US aggregate data cannot provide substantial evidence of a threshold effect on the relation between money and output.

Acknowledgements

I am grateful for comments received from B. Ravikumar and John Geweke. I am particularly indebted to Qing Zhou for her discussion and support.

Notes

¹ The Taylor's rule says that the US monetary policy follows an interest-rate feedback rule that helps the Federal Reserve to achieve both its short-run goal for stabilizing the economy and its long-run goal for inflation.

² The bank loans data is from Federal Reserve Board Statistics: Releases and Historical Data, series b1021a. One can find it through this link: http://www.federalreserve.gov/releases/h8/data/m/b1021a.txt