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  • Print publication year: 2003
  • Online publication date: May 2010

Part II - Applications of the new paradigm

Summary

In part I, we explained the deficiencies in the standard monetary paradigm, as we perceived them. We argued for a shift in focus from money to credit, and from thinking about the interest rate as determined in the money market, by the demand and supply for money, to an examination of the determinants of credit. In a sense, while we are arguing for a return to the pre– Keynesian emphasis on “loanable funds,” there is a basic difference between this new approach and the older one: we focus on the ways in which credit is different from other commodities, the central role of information in the provision of credit, and the institutions – banks and firms – which obtain that information and bear the risk associated with the provision of credit. We have also focused on the important limitations that capital market imperfections – themselves derived from limitations on information – play in limiting the ability of banks and firms to divest themselves of the risks associated with the provision of credit. We investigated how those limitations, in conjunction with the costs of bankruptcy, are critical in determining both the level and changes in the level of credit provided and we examined the role of monetary policy in affecting the amount of credit that is available and the terms at which it is available, thereby affecting the level of economic activity.

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