Book contents
- Frontmatter
- Contents
- List of tables
- Preface
- Acknowledgments
- 1 Introduction and background
- 2 Firms rationed in the credit market
- 3 Households rationed in the credit market
- 4 Households and firms rationed in the credit market
- 5 Central-bank portfolio selection and stabilization policies
- 6 Summary
- Appendix: Monetary and fiscal policies with a flexible interest rate
- Selected bibliography
1 - Introduction and background
Published online by Cambridge University Press: 06 January 2010
- Frontmatter
- Contents
- List of tables
- Preface
- Acknowledgments
- 1 Introduction and background
- 2 Firms rationed in the credit market
- 3 Households rationed in the credit market
- 4 Households and firms rationed in the credit market
- 5 Central-bank portfolio selection and stabilization policies
- 6 Summary
- Appendix: Monetary and fiscal policies with a flexible interest rate
- Selected bibliography
Summary
There are essentially two views about the way a modern economy functions: the classical view and the Keynesian view. The classicists assume that prices contain all the relevant information about market conditions and that they adjust infinitely fast so that trade takes place at the equality of demand and supply in every market; thus, producers and consumers need be concerned only with price signals. This view may correctly describe the way a simple economy with centralized markets operates, but it ignores the complex institutional structure of modern economies and the informational problems of decentralized markets, which prevent instantaneous adjustment of prices. Labor contracts, interactions between unions and firms (lags induced by wage negotiations), wage–price guidelines, absence of an auctioneer in most markets, absence of futures markets for all goods, sorting and incentive effects of prices, and so forth prevent instantaneous adjustments in prices. Admittedly, any model that attempts to capture in detail the institutional structure of a modern economy is likely to be so complex as to render the model useless. However, as a first simplifying step, instantaneous price adjustments can be ruled out; this is the point of departure for the Keynesians. Once instantaneous price adjustments are ruled out, some markets may not clear at the prevailing prices, which leads to quantity adjustments (e.g., involuntary unemployment and involuntary inventory accumulation). When quantity adjustments are required, consumers and producers become concerned with quantity signals in addition to price signals.
- Type
- Chapter
- Information
- Macroeconomic Policy AnalysisOpen Economies with Quantity Constraints, pp. 1 - 7Publisher: Cambridge University PressPrint publication year: 1989