The purpose of this research is to analyze the macroeconomic consequences of credit market imperfections and examine the channels through which monetary policy affects real economic activity. In previous research, the authors have identified episodes when the Federal Reserve undertook major shifts in monetary policy out of a desire to reduce inflation. Because these policy changes were essentially independent of real economic developments, they can be used to disentangle the effects of monetary policy, and the mechanisms through which those effects occur, from the effects of real economic developments on financial variables. In particular, the information provided by these episodes will be used to test between theories in which the impact of monetary policy on the money stock is central to the transmission mechanism and theories in which it is the impact on lending by financial intermediaries that are central. This research is important because it will provide a better understanding of the role that credit market imperfections may play in causing or contributing to macroeconomic fluctuations.
