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Dr. George Waters

Illinois State University, Normal, Illinois, USA

Abstract: Quantity rationing of credit, when some firms are denied loans, has macroeconomics effects not fully captured by measures of borrowing costs. This paper develops a monetary DSGE model with quantity rationing and derives a Phillips Curve relation where inflation dynamics depend on cyclical unemployment, a risk premium and the fraction of firms receiving financing. Unemployment arising from disruptions in credit flows is defined to be cyclical. GMM estimates using data from a survey of bank managers confirms the importance of these variables for inflation dynamics.

Full Text: “Quantity Rationing of Credit and the Phillips Curve”