Credit, financial conditions, and the monetary transmission mechanism

David Aikman, Andreas Lehnert, Nellie Liang, Michele Modugno

Research output: Contribution to journalArticlepeer-review


We show that the effects of financial conditions and monetary policy on U.S. economic performance depend nonlinearly on nonfinancial sector credit. When credit is below its trend, an impulse to financial conditions leads to improved economic performance and monetary policy transmission works as expected. By contrast, when credit is above trend, a similar impulse leads to an economic expansion in the near-term, but then a recession in later quarters.
In addition, tighter monetary policy does not lead to tighter financial conditions when credit is above trend and is ineffective at slowing the economy, consistent with evidence of an attenuated transmission of policy changes to distant forward Treasury rates in high-credit periods. These results suggest that credit is an important conditioning variable for the effects of financial variables on macroeconomic performance.
Original languageEnglish
JournalInternational journal of central banking
Publication statusAccepted/In press - 2020


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