In this paper, we address the existence of the credit channel in the transmission of monetary policy in Germany by means of a structural analysis of aggregate bank loan data. The analysis is based on a stylized model of the banking firm that characterizes the loan supply decisions of banks when monetary policy is implemented through an interest rate targeting. Using the model as a guide, we apply a vector error correction (VECM) suggested by Johansen (1988) that allows to derive long-run loan supply and loan demand relationships by imposing restrictions on cointegration vectors. The short-run dynamics of the VECM is investigated on the basis of impulse response analysis, which sets out the impact of a monetary policy shock on the variables in the system. Empirical evidence in support of the credit channel can be reported.
Monetary Policy Transmission Credit Channel Vector Error Correction Model