The macroeconomics of imperfect capital markets. Whither saving-investment imbalances?

Roberto Tamborini

No 815, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: Starting with Wicksell and until the heyday of Keynesian economics, inflation, unemployment and business cycles were thought and taught mainly as problems originating from "saving-investment imbalances" due to some form of malfunctioning of the capital market. Whereas modern studies of imperfect capital markets have greatly improved our understanding of capital market failures, their impact on macroeconomics has remained surprisingly limited. The macroeconomic consequences of saving-investment imbalances are still undeveloped in this literature The most popular macroeconomic model to date - the so-called New Neoclassical Synthesis - dispenses with capital market imperfections altogether. The aim of this paper is fill this gap. Section 2 overviews the historical foundations and the current state of the macroeconomics of imperfect capital markets. Section 3 presents a competitive, flex-price model of saving-investment imbalances where deviations of the market interest rate from the Wicksellian natural rate generate (disequilibrium) business cycles. In section 4, the model is extended in order to make the market interest rate endogenous. This extension also allows preliminary considerations to be made about monetary policy and the control of the interest rate over the business cycle. Section 5 summarizes and concludes.

Date: 2008
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Related works:
Chapter: The Macroeconomics of Imperfect Capital Markets: Whither Saving-Investment Imbalances? (2010)
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