The multifaceted effect of monetary policy on U.S. credit aggregates

Abstract

Using a Factor-Augmented Vector Autoregressive (FAVAR) model and extensions, this paper investigates the impact of monetary policy on various credit aggregates in the United States over sixty years. The analysis reveals that monetary policy impacts different types of credit heterogeneously, with credit to the financial sector reacting particularly strongly. Bank-held credit exhibits notable sensitivity to monetary policy shocks. The effects of monetary policy are also conditional on the phases of the economic and financial cycles, showing a much stronger impact during periods of expansion. Additionally, a long-term strengthening of the transmission mechanisms suggests that substantial structural changes have occurred over the past six decades.