It has long been accepted that changes in monetary policy have real economic effects; however, the mechanism by which these policy changes are transmitted to the real economy has been the subject of much debate. Traditionally the transmission mechanism of monetary policy has consisted of various channels which include the money channel, the asset price channel and the exchange rate channel. Recent developments in economic theory have led to a relatively new channel of policy transmission, termed the credit channel. The credit channel consists of the bank lending channel as well as the balance sheet channel, and focuses on the demand for credit as the variable of interest. The credit channel is based on the notion that demanders and suppliers of credit face asymmetric information problems which create a gap between the cost of external funds and the cost of internally generated funds, referred to as the wedge. The aim here is to determine the size and lag length effects of changes in credit demand, by both firms as well as households, as a result of changes in interest rates. A secondary, but subordinate, aim is to test for a balance sheet channel of monetary policy transmission. A vector autoregressive (VAR) model is used in conjunction with causality tests, impulse response functions and variance decompositions to achieve the stated objectives. Results indicate that the interest rate elasticity of credit demand, for both firms and households, is interest inelastic and therefore the monetary policy authorities have a limited ability to influence credit demand in the short as well as medium term. In light of the second aim, only weak evidence of a balance sheet channel of policy transmission is found.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:rhodes/vital:1052 |
| Date | January 2013 |
| Creators | Doig, Gregory Graham |
| Publisher | Rhodes University, Faculty of Commerce, Economics and Economic History |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis, Masters, MCom |
| Format | 179 leaves, pdf |
| Rights | Doig, Gregory Graham |
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