Answer to Question #82705 in Macroeconomics for Anshul Verma

Question

Explain the effectiveness of credit channel of monetary policy transmission by comparing the reaction of non financial companies in India.

Answer 1

The analysis of the existence of a credit channel in the transmission of monetary

impulses is a frequent topic in recent economic literature. Nevertheless, this area of research continues to suffer from certain limitations. On the theoretical level, there is a marked lack of microeconomic substantiation and a lack of precision in defining the credit channel concept. At the same time, the various empirical approaches, using alternative methodologies, are inevitably based on identification assumptions that are needed to determine to what extent changes in credit respond to alterations in credit supply or demand. Another limitation lies in the inability of the available tests to

distinguish between the different transmission mechanisms that are classified together under the concept of credit channel. Finally, although there is some agreement regarding the existence of the credit channel, the quantification of its impact and the assessment of its importance in relation to the liquidity channel have yet to be addressed with due rigour.

Source:

https://www.bis.org/publ/confp06j.pdf&ved=2ahUKEwiqvISE2bzeAhUMmbQKHWJbDRQQFjAAegQIBRAB&usg=AOvVaw2DkRYox9XscqVcYKuH4aiZ