Effects of an Obstructed Credit Channel

BRAZIL ECONOMICS - Report 31 Oct 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The credit channel is important in transmitting the effects of monetary policy. The literature contains strong evidence that the supply of credit and bank spreads magnify the effects of the interest rate on economic activity. Unfortunately, Brazil is currently passing through an unprecedented situation in which the credit channel is severely obstructed, indicating that a given level of monetary easing cannot be expected to have the same effect on economic activity as in the past. This is one of the reasons why the cycle of lowering the SELIC rate will be long and intense.

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