Volume 43, Number 171,
October-December 2012
Credit Rationing:
A Perspective from New Keynesian Economics
Abigail Rodríguez* and Francisco Venegas**
Date submitted: September 30, 2011. Date accepted: February 25, 2012

This research analyzes alternate explanations for credit rationing suggested by New Keynesian Economics and provides a classification of different theoretical contributions: a) financing and evaluating investment projects; b) relationship between lenders and borrowers; c) macroeconomics and structure of the financial system. What these models have in common under this theoretical approach is the adoption of orthodox methodology in how they interpret imbalances in the credit market. They provide different hypothesis for the origin of the imbalance, such as market failures, rigid prices and imperfect information. The main critique to this approach is not the multitude of hypotheses offered, but rather the absence of an explanation concerning the link between the credit market, monetary policy and the real sector.

Keywords: New Keynesian Economics, credit rationing, imperfect information, price rigidity.

New Keynesian Economics (nke) is a theoretical area of modern macroeconomics frequently identified as orthodox, because although it considers Keynesian problems regarding imbalances in real and financial markets as important, it approaches these ideas with a neoclassical methodology.

The theoretical approach of the nke began to be developed in 1980 as an alternative to the New Classical School.1 Among the Keynesian elements that it includes, the following stand out: a) the recognition of the existence of imbalances in real and financial markets, expressed mainly in involuntary unemployment and in credit rationing; b) the importance of real market structures and institutional agreements that affect the decisions that agents make, such as negotiations between companies and workers, or the presence of oligopolistic, price-fixing businesses.

The orthodox elements that distinguish this theoretical school of thought are: a) the micro-foundation of macroeconomic phenomena; it attempts to model the individual decisions made by homes, companies and commercial banks, who act with optimization criteria and under the assumption that the aggregate of their decisions will lead to macroeconomic results; b) the perfect rationality of economic agents that allows them to make optimal choices, even in situations of uncertainty; c) it attributes the origin of imbalances to market failures or the lack of perfect competition, such as price rigidity, price-fixing agents, or contexts with imperfect information (incomplete and asymmetrical).

For this theoretical school of thought, price rigidity is the most commonly used explanation for imbalances. For imbalances in the labor market, the nke proposal has two variants: on the one hand, it tries to show that involuntary unemployment is the result of the endogenous rigidity of the real salary (models of efficient salaries, implicit contracts and salary negotiations), and, on the other hand, it affirms that the origin of unemployment is the rigidity of nominal salaries (models of coordination failures and menu costs).

Unlike the neoclassical scenario, where price rigidity is exogenous because both the economic agent that provides this friction and the criteria used to determine price-fixing are unknown, this theoretical framework seeks to demonstrate that rigidity is endogenous, because it responds to the maximizing conduct of the economic agent with decision-making power. For involuntary unemployment, it is better for the companies to establish higher salaries than those that would balance the market, and maintain them rigid at that level, in order to ensure maximum worker productivity and maximum earnings.

Similarly, the basic interpretation of credit rationing is the rigidity of the interest rate. It is assumed that the imbalance between supply and demand occurs because the entity that grants credit establishes an interest rate higher than that which would balance the market in order to achieve maximum earnings and recover resources.

The purpose of this research is to analyze alternative explanations for credit rationing in the framework of New Keynesian Economics and to offer a classification of these contributions. This work also seeks to show the weaknesses of the approach: the multiplicity of these base hypotheses and the absence of convincing explanations regarding the link between the credit market, monetary policy and the real sector. This text is organized as follows: the second section discusses the first conceptions of credit rationing. The third section shows models for which financing is a result of the evaluation of investment projects. The fourth section presents the hypotheses that explain the relationship between lenders and borrowers. The fifth section demonstrates the models that relate credit rationing, the structure of the financial system and the macroeconomic context, and also presents the link between the theoretical scenario and empirical evidence from the recent international crisis. Finally, the sixth section presents the conclusions.

1 The New Classical School extends the results of the Neoclassical Theory to demonstrate the existence of general competitive balance, even in scenarios of uncertainty, under the assumption that agents supplement the limited information with rational expectation models.

* Professor at the National Autonomous University, Xochimilco. Email: arnava @correo.xoc.uam.mx. The author is grateful to the Mexican Academy of Sciences, The National Council for Science and Technology and the Consultative Council of Sciences of the Presidency of the Republic (Mexico) for their support with this research.

** Professor at the National Polytechnic Institute, Superior School of Economics. Email: fvenegas1111@yahoo.com.mx

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 50, Number 196 January-March 2019 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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