, the so - called credit channel of monetary - policy transmission. in fact, as i will discuss, these two ideas are essentially related. as someone who ( in a former life ) did research on both of these topics, i thought it might be useful for me to provide a somewhat personal overview of the financial accelerator and credit channel ideas and their common underlying logic. along the way i will offer a few thoughts on where future research might be most productive. market frictions and the real effects of financial and credit conditions economists have not always fully appreciated the importance of a healthy financial system for economic growth or the role of financial conditions in short - term economic dynamics. as a matter of intellectual history, the reason is not difficult to understand. during the first few decades after world war ii, economic theorists emphasized the development of general equilibrium models of the economy with complete markets ; that is, in their analyses, economists generally abstracted from market " frictions " such as imperfect information or transaction costs. but without such frictions, financial markets have little reason to exist. for example, with complete markets ( and if we ignore taxes ), we know that whether a corporation finances itself by debt or equity is irrelevant ( the modigliani - miller theorem ). the blossoming of work on asymmetric information and principal - agent theory, led by nobel laureates joseph stiglitz and george akerlof and with contributions from many other researchers, gave economists the tools to think about the central role of financial markets in the real economy. for example, the classic 1976 paper by michael jensen and william meckling showed that, in a world of imperfect information and principal - agent problems, the capital structure of the firm could be used as a tool by shareholders to better align the incentives of managers with the shareholders'interests. thus was born a powerful and fruitful rejoinder to the modigliani - miller neutrality result and, more broadly, a perspective on capital structure that has had enduring influence. my own first job as an academic was at stanford university, where i arrived as an assistant professor in the graduate school of business in 1979. at the time, stanford was a hotbed of work on asymmetric information, incentives, and the principal - agent problem ; and even though my field was macroeconomics, i was heavily influenced by that intellectual environment. i became particularly interested in how this perspective on financial markets could help explain why financial crises – that is, extreme disruptions of the

tended to force a contraction in deposits. regulation q, which capped interest rates payable on deposits, prevented banks from offsetting the decline in deposits by offering higher interest rates. moreover, banks had limited alternatives to deposits as a funding source. thus, monetary tightening typically resulted in a shrinking of banks'balance sheets and a diversion of funds away from the banking system, a phenomenon known as disintermediation. the extension of credit to bankdependent borrowers, which included many firms as well as households, was consequently reduced, with implications for spending and economic activity. of course, much has changed in u. s. banking and financial markets since the 1960s and 1970s. reserve requirements are lower and apply to a smaller share of deposits than in the past. regulation q is gone. and the capital markets have become deep, liquid, and easily accessible, either directly or indirectly, to almost all depository institutions. although the traditional bank - lending channel may still be operative in economies that remain relatively more bank - dependent, as recent research has found for some european countries ( ehrmann and others, 2003 ), in the united states today it seems unlikely to be quantitatively important. this is not to say, however, that financial intermediation no longer matters for monetary policy and the transmission of economic shocks. for example, although banks and other intermediaries no longer depend exclusively on insured deposits for funding, nondeposit sources of funding are likely to be relatively more expensive than deposits, reflecting the credit risks associated with uninsured lending ( stein, 1998 ). moreover, the cost and availability of nondeposit funds for any given bank will depend on the perceived creditworthiness of the institution. thus, the concerns of holders of uninsured bank liabilities about bank credit quality generate an external finance premium for banks that is similar to that faced by other borrowers. the external finance premium paid by banks is presumably reflected in turn in the cost and availability of funds to bank - dependent borrowers. importantly, this way of casting the bank - lending channel unifies the financial accelerator and credit channel concepts, as the central mechanism of both is seen to be the external finance premium and its relationship to borrowers'balance sheets. the only difference is that the financial accelerator focuses on the ultimate borrowers – firms and households – whereas financial intermediaries are the relevant borrowers in the theory of the credit channel. by the way, the existence of loan sales and