NBER WORKING PAPER SERIES

CREDIT RATIONING AND EFFECTIVE SUPPLY FAILURES

Alan S. Blinder

Working Paper No. 1619

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 1985

The research reported here has been supported by the National Science Foundation, and was done in part while I was a visiting fellow at the Institute for International Economic Studies, Stockholm, Sweden. I am grateful for comments received at seminar presentations at the Institute, Princeton, Harvard, Columbia, Brown, the Center of Planning and Research in Athens, and the National Bureau of Economic Research; and for discussions of these topics with Rudiger Dornbusch, Stanley Fischer, Benjamin Friedman,

Michael Horgan, Leonard Nakamura, John Seater, Dennis Snower,

Robert Solow, Joseph Stiglitz and Lawrence Summers. Finally, it was a remark made at a seminar some years ago by Robert Mundell which first got me scratching my head about the concept of "effective supply." The research reported here is part of the NBER's research program in Economic Fluctuations. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research.

NBER Working Paper #16 19 May 1985

Credit Rationing and Effective Supply Failures

ABSTRACT

This paper presents two macro models in which central bank policy has real effects on the supply. side of the economy due to credit rationing. In each model, there are two possible regimes, depending on whether credit is or is not rationed. Starting from an unrationed equilibrium, either a large enough contraction of bank reserves or a large enough rise in aggregate demand can lead to rationing. Monetary (fiscal) policy is shown to be more (less) powerful when there is rationing than when there is not. In the first model, credit rationing reduces working capital. There is a failure of effective supply in that credit—starved firms must reduce production below national supply. The