The Theory of Credit and Macro-economic Stability

Joseph Stiglitz

No 22837, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct distortions.

JEL-codes: E42 E44 E51 G01 G20 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-pke
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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