Working Paper: NBER ID: w2188
Authors: Bruce Greenwald; Joseph E. Stiglitz
Abstract: This paper summarizes the macro-economic and, in particular, monetary and financial market implications of recent developments in the micro-economic theory of imperfect information. These micro-economic models which lead to credit-rationing on the one hand and limitations in the availability of equity type financing on the other can account for a wide range of observed business cycle and monetary phenomena. These include (a) unemployment, (b) the existence of Keynesian-type multiples, (c) the observed lack of production smoothing in response to cyclical fluctuations in demand, (d) the impact of monetary policy on business activity despite the absence of significant changes in real interest rates, and (e) price rigidities which arise from rational firm decisions (not as an a priori assumption).
Keywords: Imperfect Information; Economic Fluctuations; Monetary Policy; Credit Rationing
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Real money supply (E51) | Consumption (E21) |
| Real money supply (E51) | Aggregate demand (E00) |
| Credit constraints (E51) | Investment (G31) |
| Credit constraints (E51) | Production (L23) |
| Credit constraints (E51) | Unemployment (J64) |
| Monetary policy actions (E52) | Business activity (M21) |