Nobel Lecture: Banking, Credit, and Economic Fluctuations†

Credit markets, including the market for bank loans, are character-ized by imperfect and asymmetric information. These informational frictions can interact with other economic forces to produce periods of credit-market stress, in which intermediation is unusually costly and households and businesses have difficulty obtaining credit. A high level of credit-market stress, as in a severe financial crisis, may in turn produce a deep and prolonged recession. I present evidence that financial distress and disrupted credit markets were important sources of the Great Depression of the 1930s and the Great Recession of 2007-2009. Changes in the state of credit markets also play a role in " garden-variety" business cycles and in the transmission of mon-