A Handbook of Alternative Monetary Economics
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A Handbook of Alternative Monetary Economics

Edited by Philip Arestis and Malcolm Sawyer

This major Handbook consists of 29 contributions that explore the full range of exciting and interesting work on money and finance currently taking place within heterodox economics. There are many themes and facets of alternative monetary and financial economics but two major ones can be identified.
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Chapter 19: Credit Rationing

Roy J. Rotheim


Roy J. Rotheim Introduction The purpose of this chapter is to assess and elaborate on the literature that has developed among New Keynesian economists1 addressing the topic of credit rationing, and then to reflect on the nature of the resulting theory and policy from a post-Keynesian perspective. The phrase credit rationing emerged in the early New Keynesian literature (see Hodgman, 1960; Stiglitz and Weiss, 1971; Jaffe and Russell, 1976) to identify the possibility that an equilibrium might occur in the credit market but where some individuals would be unable to borrow funds even though they were willing to pay this equilibrium rate.2 So while there is an excess demand for funds in the market for liquidity at the current rate of interest, there are no internal forces that would cause that excess demand to be mitigated. The existence of credit rationing provides, according to New Keynesian economists, a ‘rigorous’ theoretical foundation for explaining credit market failure and what they call the ‘credit channel view’ of monetary policy. These writers find such ‘market failures’ to have consequences both for individual borrowers and lenders, and for policy makers. Market failures that lead to credit rationing cause changes in the money stock to have real economic implications; the classical dichotomy is violated and monetary policy may not have its desired results of regulating inflation. The focus of post-Keynesians is first and foremost methodologically different from the New Keynesian view. The post-Keynesian perspective depicts an open system approach, Keynes’s theory...

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