Uncertainty in a Model with Credit Frictions

Understanding phenomena such as the recent financial crisis, and possible policy responses, requires the use of a macroeconomic framework in which financial intermediation matters for the allocation of resources. Neither standard macroeconomic models that abstract from financial intermediation nor traditional models of the “bank lending channel” are adequate as a basis for understanding the recent crisis. Instead we need models in which intermediation plays a crucial role, but in which intermediation is modeled in a way that better conforms to current institutional realities. In particular, we need models that recognize that a market-based financial system—one in which intermediaries fund themselves by selling securities in competitive markets, rather than collecting deposits subject to reserve requirements—is not the same as a frictionless system. I sketch the basic elements of an approach that allows financial intermediation and credit frictions to be integrated into macroeconomic analysis in a straightforward way. I show how the model can be used to analyze the macroeconomic consequences of the recent financial crisis and conclude with a discussion of some implications of the model for the conduct of monetary policy.

Download Full-text

Credit Rationing and Pass-Through in Supply Chains: Theory and Evidence from Bangladesh

American Economic Journal Applied Economics ◽

10.1257/app.20190083 ◽

2021 ◽

Vol 13 (3) ◽

pp. 202-236

Author(s):

M. Shahe Emran ◽

Dilip Mookherjee ◽

Forhad Shilpi ◽

M. Helal Uddin

Keyword(s):

Supply Chain ◽

Standard Model ◽

Government Regulation ◽

Trade Credit ◽

Credit Rationing ◽

Credit Access ◽

The Standard Model ◽

Retail Prices ◽

Credit Frictions ◽

Pass Through

Traders are often blamed for high prices, prompting government regulation. We study the effects of a government ban of a layer of financing intermediaries in edible oil supply chain in Bangladesh during 2011–2012. Contrary to the predictions of a standard model of an oligopolistic supply chain, the ban caused downstream wholesale and retail prices to rise, and pass-through of the changes in imported crude oil price to fall. These results can be explained by an extension of the standard model to incorporate trade credit frictions, where intermediaries expand credit access of downstream traders. (JEL L13, L14, L66, O13, Q11, Q13, Q17)

Download Full-text