New Keynesian Economics/Post Keynesian Alternatives

By Roy J. Rotheim | Go to book overview

Part III

MONEY, CREDIT RATIONING AND ASYMMETRIC INFORMATION

This part of the book, on ‘Money, Credit Rationing and Asymmetric Information’, contains five chapters each directed to the role of money and finance in New and Post Keynesian models.

New Keynesian writers tend to follow two paths of reasoning, although with a fair degree of overlap. In its narrowest incarnation, New Keynesian theory focuses on the circumstances underlying some market, in this case a credit market, which prevents an efficient allocation of loanable funds between savers and investors. The primary reason given for these misallocations is the existence of asymmetries in information which lead to a relative stickiness in real interest rates. Money in these narrowly defined models must take on the role of an exogenously given stock; otherwise the possibility of an endogenous money stock reduces the relevancy of any relationship between savings, investment and the rate of interest—we move out of a loanable funds theory of the rate of interest into a Keynesian world where liquidity preference becomes the decisive factor in explaining the behaviour of individuals and financial institutions.

In the less narrow models of asymmetric information and credit rationing, New Keynesians—especially Stiglitz and Greenwald—have begun to downplay the importance of sticky prices in the overall model. Inefficiencies in capital markets may now find their source in credit rationing behaviour on the part of lending institutions. Such attempts at realism, over the last decade, have led these New Keynesian writers into two conflicting positions, however. On the one hand, their continued reliance on the notion of an aggregate capital market has restricted any richness that might emerge from their appeal to realism. On the other hand, such movements towards realism, and away from the limiting, closed, deductive, market-based New Keynesian conclusions of the narrow model, have pushed them onto an irrevocable path towards a Post Keynesian perspective where income, output and employment are liable to change in the aggregate. To the extent that the New Keynesian research programme falls back into the safe confines of the narrow market-based model, the project begun by Stiglitz and Greenwald will bear little fruit. To the extent that they reject the supply and demand framework of an aggregate capital market, the assumption that lending and borrowing decisions are based on calculable probabilities of the yield on capital assets, and the

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