The credit market is an important subject in today’s macroeconomic world. Prior to the introduction of the credit market, traditional models only included the goods market and money market to form the IS-LM model. Under this IS-LM model, a change in money supply would have a known effect, such as a monetary expansion policy will result in a drop in the bond rate because the IS curve will remain constant. However, many previous studies did not show this effect, but instead the opposite; those that did show this effect, the magnitude of the shift was different than a traditional IS-LM model. Once the credit market is introduced into the IS-LM model, both the goods market (IS curve) and the money market (LM curve) will shift, resulting in an undetermined change in bond rate, and will also introduce the loan rate, which also shows an undetermined change. Under this model, when a monetary expansionary policy is in effect, it is possible that the bond rate could decrease, increase, or remain constant. This thesis will determine how the credit channel operates in Taiwan, using quarterly data from 1992Q1 to 2009Q4. The final result shows that under this new model, the credit channel in Taiwan does not necessarily follow the previously-known theory.

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