Monetary Policy, Credit and Aggregate Supply: The Evidence from Italy

Abstract

This paper relates to the macroeconomic and monetary policy aspects of the so-called "credit channel" of monetary transmission. We present an intertemporal macroeconomic equilibrium model of a competitive economy where current production is financed by bank credit, and then we use it to identify the credit transmission mechanism in data drawn from the Italian economy. We find evidence that the "credit variables" identified by the model, the overnight rate and a measure of credit risk, have permanent effects on employment and output through the supply side of the economy by altering credit supply conditions to firms.

Keywords: Monetary policy, Credit, Italian economy

JEL Classification: E2, E5