The credit card and small business lending channels of monetary policy

Abstract

This paper analyzes the lending channel of monetary policy exclusively through credit card and small business bank loans. A time-varying parameter vector autoregression is estimated, providing evidence that the direction and strength in which credit card and small business loans respond to monetary policy are time-dependent. To investigate these findings analytically, I develop a general equilibrium model of consumer credit card and small business lending. Households and firms use a combination of monetary assets and bank loans to finance random consumption and investment opportunities. In accordance with conventional theory, when borrowers are sufficiently constrained, a monetary tightening reduces lending through the balance sheet subchannel of monetary policy. However, when borrowers are less constrained, a monetary tightening raises unsecured debt limits through a second subchannel and lending expands. This second subchannel, operating solely through unsecured credit, offers a new theory to justify an expansionary loan response to tightened monetary policy that the traditional lending channel literature has yet to address.