The credit channel of monetary policy transmission: Evidence from stock returns

This paper offers a novel test of the credit view of the monetary policy tr ansmission mechanism using stock market returns. We identify, Fed policy sh ocks using newspaper accounts and track daily stock prices immediately foll owing the shocks. If the credit channel is important, then firms that are d ependent on bank credit and internal funds should receive a relatively grea ter benefit (loss) from a Fed easing (tightening) than firms with access to nonbank credit at favorable terms. We identify ten policy shocks during th e expansion of 1993-94 and the "credit crunch" period of the 1990-91 recess ion and find little evidence supportive of an operative credit channel.