Working Paper: NBER ID: w3533
Authors: Bruce C. Greenwald; Joseph E. Stiglitz
Abstract: This paper presents a simple, general equilibrium macroeconomic model incorporating financial constraints, both credit and equity rationing, as well as other informational imperfections in labor and product markets, such as efficiency wage effects. A formulation somewhat analogous to the standard IS-LM model, but not suffering from the well known defects of that model, is derived. The mechanisms by which monetary policy affects the economy are described. Dynamics, including implications for long run growth, are investigated.
Keywords: Macroeconomic Models; Credit Rationing; Equity Rationing; Monetary Policy
JEL Codes: E44; E52; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect information in credit markets (D82) | lenders fix interest rates (E43) |
| lenders fix interest rates (E43) | ration credit (E51) |
| ration credit (E51) | amplifies output responses of firms to demand disturbances (H32) |
| ration credit (E51) | increases importance of internally generated funds for investment decisions (G31) |
| increased importance of internally generated funds for investment decisions (G31) | reduces stabilizing role of monetary policy (E63) |
| equity market imperfections (D53) | hinder firms' ability to raise funds through equity issuance (G32) |
| hindered ability to raise funds through equity issuance (G32) | constrains investment behavior (G31) |
| higher levels of uncertainty about future profitability (D89) | lower investment and output levels (E22) |
| lower investment and output levels (E22) | increased bankruptcy risks (G33) |