The notion that monetary policy affects the level of economic activity in a country not only by adjusting short-term interest rates, but also by fine-tuning the amount and terms of bank loans. Credit channel is a mechanism of monetary policy (monetary policy transmission) that establishes a connection between a central bank’s policy changes and the amount of credit that banks can extend to their customers.

Credit channel model considers explicitly how changes in financial conditions can affect monetary policy. Alternation of monetary policy has noticeable effects on aggregate demand, and consequently on both economic output and prices. Policy actions get transmitted to the real economy via multiple channels including interest rate channel, bank lending channel, balance sheet channel, and exchange rate channel.