Is Bank Lending Important for the Transmission of Monetary Policy? an Overview

The importance of banks for the transmission of monetary policy has been a major topic in monetary economics for some time, and several factors have served to heighten that interest recently. One such factor has been the slower than expected U.S. recovery from the 1990-91 recession, which was accompanied by slow growth in bank lending. This spawned a substantial literature on regulatory-induced credit crunches, with a number of studies finding that bank lending behavior was a major contributing factor to the slow expansion. A second factor has been the importance of banks in recent international economic crises. Japan, Latin America, and Scandinavia have each experienced major problems in their banking sectors that coincided with severe recessions. The role of banks in both the crises and the subsequent recoveries is likely to be the subject of research for some time. A third factor is the recent (and ongoing) structural change in banking, which may significantly alter the role of banks in the transmission of monetary policy. As the banking industry and financial markets in general continue to evolve, it is not yet clear how useful historical data will be in understanding future business cycle fluctuations. Thus, a major concern of policymakers must be understanding the ways that changes in the banking industry and in the patterns of firm finance may alter our ability to control, or even predict, business cycle fluctuations. To improve our understanding of the role of banks in the transmission of monetary policy, the Federal Reserve Bank of Boston convened