Credit Rationing and Effective Supply Failures

55 Pages Posted: 27 Dec 2001 Last revised: 5 Dec 2022

See all articles by Alan S. Blinder

Alan S. Blinder

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

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

Blinder, Alan S., Credit Rationing and Effective Supply Failures (May 1985). NBER Working Paper No. w1619, Available at SSRN: https://ssrn.com/abstract=278753

Alan S. Blinder (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

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