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http://www.jstor.org Fri Sep 7 14:36:05 2007
IS IT MONEY OR CREDIT, OR BOTH, OR NEITHER??
Credit, Money, and Aggregate Demand
By BEN S. BERNANKE AND ALANS. BLINDER*
Most standard models of aggregate demand, such as the textbook IS/LM model, treat bank assets and bank liabilities asymmetrically. Money, the bank liability, is gven aspecial role in the determination of aggregate demand. In contrast, bank loans are lumped together with other debt instruments in a "bond market," which is then conveniently suppressed by Walras' Law. Much recent research provides reasons to question t h s imbalance. A growing theoretical literature, based on models with asymmetric information, stresses the importance of intermediaries in the provisionof credit and the special nature of bank loans. Empirically, the instability of econometric moneydemand equations has been accompanied by new interest in the credit-GNP relationship (see especially the work of Benjamin Friedman). We have developed several models of aggregate demand which allow roles for both money and "credit" (bank loans). We present a particularly simple one, a variant of thetextbook IS/LM model, in t h s paper. Though it has a simple graphcal representation like IS/LM, t h s model permits us to pose a richer array of questions than does the traditional money-only framework.
I. The Model
The LM curve is a portfolio-balance condition for a two-asset world: asset holders choose between money and bonds. Tacitly, loans and other forms of customer-market
credit areviewed as perfect substitutes for auction-market credit ("bonds"), and financial markets clear only by price. Models with a distinct role for credit arise when either of these assumptions is abandoned. Following James Tobin (1970) and Karl Brunner and Allan Meltzer (1972), we choose to abandon the perfect substitutability assumption and ignore credit rationing.' Our model has three assets: money,bonds, and loans. Only the loan market needs explanation. We assume that both borrowers and lenders choose between bonds and loans according to the interest rates on the two credit instruments. If p is the interest rate on loans and i is the interest rate on bonds, then loan demand is: Ld = L(p, f, ). The dependence on GNP ( y ) captures the transactions demand for credit, whch might arise, for...