The Simple IS-LM Model With Credit Rationing

Roland Buck

Document Type

Article

Publication Date

2004

Abstract

This paper examines how the effects of credit rationing can be incorporated into the simple IS-LM model. When credit rationing occurs, firms are not able to sell all the bonds they desire at the current rate of interest. Therefore transactions take place and are finalized at a price at which the implicit bond market underlying the model fails to clear. The non-market-clearing analysis derived from Clower's dual decision hypothesis is used to analyze the impact of such non-market-clearing transactions on the IS and LM curves.

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