Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment

The crucial shortcoming of most previous empirical work on the bank lending channel is the inability to identify whether movements in bank debt reflect shocks to overall credit demand or shocks to bank loan supply. An examination is made of Kashyap, Stein and Wilcox's (1993) analysis of bank lending channel. In contrast to their use of aggregate data, the mix of bank and nonbank debt is analyzed separately. The results cast serious doubt on Kashyap, Stein and Wilcox's story about the transmission of monetary policy. Using data for the US manufacturing sector, little evidence is found that a monetary shock changes the mix of bank and nonbank debt for either small or large firms. Rather, the main effect of a monetary contraction is to shift financing of all types from small firms to large firms.