Mark Gertler, Peter Karadi, 10 March 2015

Evidence of the impact of monetary policy on economic activity supports conventional models with nominal rigidities. This column highlights the importance of the ‘credit channel’ of monetary policy. Unanticipated tightening produces a significant drop in real activity. However, monetary policy responses produce large movements in credit costs, which are due to the reaction of term premia and credit spreads. Therefore, to account for credit costs, it might be necessary to amend macroeconomic models to control for term premia and credit spreads.

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