creditinthemacroeconomy

creditinthemacroeconomy - NOTES ON CREDIT IN THE...

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1 NOTES ON CREDIT IN THE MACROECONOMY 1 HAKAN YILMAZKUDAY Credit-related aspects of business cycles and macroeconomic policy are not new issues in economic literature. Nevertheless, new theoretical insights about the economic implications of imperfect information have led economists to think about the role of credit in macroeconomy. This paper contributes to the literature by analyzing the macroeconomic role of credit or, in particular, the credit creation process. Here, credit creation means making the savings of specific individuals or firms available for the use of other individuals or firms. In this aspect, the efficiency of credit creation process is measured both by the direct costs of extending credit and by the degree to which it is able to channel an economy’s savings into the most productive potential uses. Although traditional macroeconomic models assume that the credit channel of macroeconomic policy functions efficiently, it may sometimes work poorly and even break down. These alternative scenarios are the main concerns of this paper. In particular, the essence of the credit creation process is the gathering and transmission of information. Early studies, such as Modigliani and Miller (1958), and Fama (1980), have assumed complete markets, that is, there is perfect information in credit markets. After the influential paper of Akerlof (1970) on imperfect information, researchers realized the possibility that there may be no price that equates supply and demand in a market with imperfect information. When there is imperfect information in the credit market, there is no price (in this case, interest or expected yield) that clears this market. What is needed is a variety of other institutional mechanisms to overcome the problems
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This note was uploaded on 01/11/2012 for the course ECO 601 taught by Professor Hakanyilmazkuday during the Fall '11 term at FIU.

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creditinthemacroeconomy - NOTES ON CREDIT IN THE...

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