Monetary policy and credit flows: A tale of two effective lower bounds

Persistent URL
Author(s)
Bianco, Timothy
Herrera, Ana Maria
Date Issued
March 27, 2025
Abstract
This paper evaluates the quantitative effects of monetary policy on credit flows. Using Compustat data and a factor-augmented vector autoregression where monetary policy shocks are identified via an external instrument, we show that monetary policy promotes long-term credit creation while delaying or preventing long-term credit destruction. In parallel, it reduces short-term credit creation and destruction, effectively reallocating credit toward longer maturities. Focusing on two effective lower bound periods, we show that monetary policy prompted a reshuffling of credit toward financially constrained firms, notably small, young, and high-default-probability firms. Our findings underscore the effectiveness of monetary policy in steering credit toward financially constrained firms and stimulating future economic activity near the effective lower bound.
Journal
Journal of Economic Dynamics & Control
Department
Business and Economics
Citation
Bianco, Timothy and Ana María Herrera., 2025. "Monetary Policy and Credit Flows: A Tale of Two Effective Lower Bounds," Journal of Economic Dynamics and Control 175: 105084. doi:10.1016/j.jedc.2025.105084. https://www.sciencedirect.com/science/article/pii/S0165188925000508.
Publisher
Elsevier
Version of Article
Published version
Preprint
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To access the pub;lished article, go to https://doi.org/10.1016/j.jedc.2025.105084
DOI
10.1016/j.jedc.2025.105084
ISSN
0165-1889
1879-1743
Rights
© 2025 Elsevier B.V. All rights are reserved, including those for text and data mining, AI training, and similar technologies.
Subjects

Monetary policy

Credit reallocation

Business cycles

External instruments

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