The Simple IS-LM Model With Credit Rationing
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.
Southwestern Economic Review, Vol. 31, 2004, 141-156.