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

In: Encyclopedia of Finance

Author

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  • Ying Wu

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

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.

Suggested Citation

  • Ying Wu, 2022. "Equilibrium Credit Rationing and Monetary Non-neutrality in a Small Open Economy," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 47, pages 1123-1135, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_47
    DOI: 10.1007/978-3-030-91231-4_47
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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