Credit Rationing and Effective Supply Failures
55 Pages Posted: 27 Dec 2001 Last revised: 5 Dec 2022
Date Written: May 1985
Abstract
This paper presents two macro models in which central bank policy has real effects on the supply side of the economy due to credit rationing. In each model, there are two possible regimes, depending on whether credit is or is not rationed. Starting from an unrationed equilibrium, either a large enough contraction of bank reserves or a large enough rise in aggregate demand can lead to rationing. Monetary (fiscal) policy is shown to be more (less) powerful when there is rationing than when there is not. In the first model, credit rationing reduces working capital. There is a failure of effective supply in that credit-starved firms must reduce production below national supply. The resulting excess demand in the goods market may in turn drive prices up and reduce the real supply of credit further, leading to further reductions in supply and a stagflationary spiral. In the second model, credit rationing reduces investment, which cuts into both aggregate demand and supply. Despite the effect on demand, stagflationary instability is still possible. A rise in government spending crowds out investment in the rationed regime but crowds in investment in the unrationed regime.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Federal Funds Rate and the Channels of Monetary Transnission
By Ben S. Bernanke and Alan S. Blinder
-
Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms
By Mark Gertler and Simon Gilchrist
-
Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance
By Anil K. Kashyap, David W. Wilcox, ...
-
Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance
By Anil K. Kashyap, Jeremy C. Stein, ...
-
Credit, Money, and Aggregate Demand
By Ben S. Bernanke and Alan S. Blinder
-
The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds
By Lawrence J. Christiano, Martin Eichenbaum, ...
-
Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates
-
Monetary Policy and Bank Lending
By Anil K. Kashyap and Jeremy C. Stein
-
The Impact of Monetary Policy on Bank Balance Sheets
By Anil K. Kashyap and Jeremy C. Stein