Credit Rationing and Effective Supply Failures

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, whichcuts into both .aggregatedemand 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 unraticrxed regime.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 223 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.