The Credit Rationing Model and the Novo-Keynesian Monetary Policy: A Critical Analysis

The paper discusses and criticizes the credit rationing model (CRM) and its useto support the new-Keynesian approach to the monetary policy. After analyzing the workingof the model in the different phases of the business cycle it is concluded that: (i) in theupward phase, demand rationing equilibrium — which is a condition for recommendationof counter-cyclical monetary policy in the CRM scope — is not plausible as a macroeconomicphenomenon, but only at microeconomic level; (ii) in the downward phase, althoughthe demand rationing is a plausible equilibrium, it does not occur for the reason alleged by the CRM (the rigidity of the interest rate), neither it does act in favour of the transmissionmechanism of monetary policy. These conclusions imply the rejection of the CRM as theoreticalbasis for monetary policy analysis, as well as of the new-Keynesian approach about thistheme. Finally, it is argued that, at macroeconomic level, the unique theoretical contributionof the CRM is to justify “vertical” interventions of government in financial markets, throughfinancing policies to sectors or projects which risks are more difficult to estimate, notably, ininfra-structure, R&D and new-technology sectors. JEL Classification: E12; G21; G31.