THE ROLE OF CREDIT MARKET IMPERFECTIONS IN THE MONETARY TRANSMISSION MECHANISM - ARGUMENTS AND EVIDENCE

Recently, a debate has resurfaced on whether and how credit market imperfections may play a role in the transmission of monetary policy. This new literature attempts to identify the effects of credit market imperfections by analyzing the response to tight money of different forms of credit and different types of borrowers. The arguments and evidence in this literature are reviewed and some new evidence is presented. There is a striking difference in response of credit flows to small versus large borrowers, potentially consistent with the view that credit market imperfections help propagate the impact of monetary policy.