The Credit Channel

The credit channel is an enhancement mechanism for traditional monetary policy transmission, not a truly independent or parallel channel. Discuss

The traditional monetary policy transmission works through a number of conventional channels: interest rate effect, exchange rate effect, asset price effect and through expectations. The stance of monetary policy acts as a signal to firms and individuals about what the central bank thinks the future state of the economy will look like, and thus affects investment and spending decisions by agents now based on this. A higher interest rate could imply that the central bank thinks the economy is doing well, which may induce firms and consumers to spend more, because of this signal. [...]