Equilibrium Credit Rationing and Monetary Non-neutrality in a Small Open Economy

Ying Wu ()
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Ying Wu: Franklin P. Perdue School of Business, Salisbury University

Chapter 47 in Encyclopedia of Finance, 2022, pp 1123-1135 from Springer

Abstract: Abstract This chapter modifies the well-known Mundell-Fleming model by adding equilibrium credit rationing as well as imperfect asset substitutability between bonds and loans. When the representative bank’s backward-bending loan supply curve peaks at its profit-maximizing loan rate, credit rationing can be an equilibrium phenomenon, which makes credit-dependent capital investment solely dependent upon the availability of customer-market credit. With the rationing, an expansion in money and credit shifts the IS curve as well as the LM curve even in a small open economy under a regime of fixed exchange rates, and the magnitude of offset coefficient between domestic and foreign asset components of high-powered money is less than one. In contrast, if there is no credit rationing, imperfect asset substitutability between bonds and loans per se cannot generate the real effect of money in the same model.

Keywords: Credit rationing; Monetary policy; Capital flow; Mundell-Fleming model; Monetary neutrality; Open market operation; IS-LM curves; Offset coefficient; Monetary base; Small open economy (search for similar items in EconPapers)
JEL-codes: E51 F41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-030-91231-4_47

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