Journal of Economic Perspectives-Volume 9, Number fAll 1995-Pagres 27-48 Inside the black box: The Credit Channel of Monetary Policy Transmission Ben s. bernanke and mark gertler M ost economists would agree that, at least in the short run, monetary policy can significantly influence the course of the real economy. In deed, a spate of recent empirical research has confirmed the early find- ing of Friedman and Schwartz(1963)that monetary policy actions are followed by movements in real output that may last for two years or more(Romer and Romer, 1989 Bernanke and Blinder, 1992; Christiano, Eichenbaum and Evans, 1994a, b) There is far less agreement however about exactly how monetary policy exerts its influence: the same research that has established that changes in monetary policy are event tually followed by changes in output is largely silent about what happens in the interim. To a great extent, empirical analysis of the effects of monetary policy has treated the monetary transmission mechanism itself as a"black box Of course, conventional views of how monetary policy works are readily avail- able. According to many textbooks, monetary policymakers use their leverage over short-term interest rates to influence the cost of capital and, consequently, spending on durable goods, such as fixed investment, housing, inventories and consumer durables. In turn, changes in aggregate demand affect the level of production. But the textbook story is incomplete in several important ways One problem is that, in general, empirical studies of supposedly"interest sensitive"components of aggregate spending have in fact had great difficulty in identifying a quantitatively important effect of the neoclassical cost-of-capital vari- able.Indeed, the most common finding is that nonneoclassical factors--for examp pected price changes, is(r+ d)Pe, where ris the required real return to lenders(which could include sk), d is the depreciation rate and pa is the price a Ben S. Bernanke is Class of 1926 Professor of Economics and Public Affairs, Princeton University, Princeton, New Jersey (e-mail: bernanke@wws. princeton. edu). Mark gertler is Professor of Economics, New York University, New York, New York (gertler@ fasecon. econ. nyu. edu)Journal of Economic Perspectives-Volume 9, Number 4-Fall 1995-Pages 27-48 Inside the Black Box: The Credit Channel of Monetary Policy Transmission Ben S. Bernanke and Mark Gertler M s ff ost economists would agree that, at least in the short run, monetary policy can significanty influence the course of the real economy. In￾deed, a spate of recent empirical research has confirmed the early find￾ing of Friedman and Schwartz (1963) that monetary policy actions are followed by movements in real output that may last for two years or more (Romer and Romer, 1989; Bernanke and Blinder, 1992; Christiano, Eichenbaum and Evans, 1994a,b). There is far less agreement, however, about exactly how monetary policy exerts its influence: the same research that has established that changes in monetary policy are eventually followed by changes in output is largely silent about what happens in the interim. To a great extent, empirical analysis of the effects of monetary policy has treated the monetary transmission mechanism itself as a "black box." Of course, conventional views of how monetary policy works are readily avail￾able. According to many textbooks, monetary policymakers use their leverage over short-term interest rates to influence the cost of capital and, consequently, spending on durable goods, such as fixed investment, housing, inventories and consumer durables. In turn, changes in aggregate demand affect the level of production. But the textbook story is incomplete in several important ways. One problem is that, in general, empirical studies of supposedly "interest￾sensitive" components of aggregate spending have in fact had great difficulty in identifying a quantitatively important effect of the neoclassical cost-of-capital vari￾able.' Indeed, the most common finding is that nonneoclassical factors-for example, ' In a frictionless market, the usual Jorgensonian formula for the neoclassical cost of capital, ignoring expected price changes, is (r + d)pk, where ris the required real return to lenders (which could include a premium for systematic risk), d is the depreciation rate and pk is the price of a new capital good. * Ben S. Bernanke is Class of 1926 Professor of Economics and Public Affairs, Princeton University, Princeton, New Jersey (e-mail: bernanke@wws.princeton.edu). Mark Gertler is Professor of Economics, New York University, New York, New York (gertlerm@ fasecon. econ. nyu. edu)