Was There Ever a Lending Channel?


  • Helpful comments from John Cochrane, Anil Kashyap, and Jeremy Stein are gratefully acknowledged.


The lending channel model posits that control of deposits that have reserve requirements allows the Fed to constrain the loans to businesses and consumers that are the comparative advantage of banks. The constraint works because banks do not use traded assets and liabilities with no reserve requirements to offset the effects of variation in deposits on loans. The results presented here are more consistent with an alternative model in which profit-maximising banks vary traded assets and liabilities with and without reserve requirements to exercise profit opportunities in loans and so shield them from the Fed.