Credit Rationing: Issues and Questions

Abstract

THE QUESTION OF CREDIT RATIONING has been the subject of a number of theoretical discussions during the past twenty-five years. Credit rationing arguments occupied an important place in the so-called availability doctrine. The availability doctrine became prominent during the early fifties as a theory explaining how monetary policy could have eSects on spending and the real sector of the economy even in the presence of Keynesian difficulties then widely believed in, such as insufficiently interest-elastic investment demand. The doctrine, whose most articulate exponent was Roosa [38],1 emphasized that reductions in the money supply would have significant restrictive eSects on spending, even if they result in only a small interest rate increase, or if spending is not, or only insufficiently, curtailed by such an increase. This was simply because banks would be forced to reduce the amount of credit they could extend to their customers, even if customers did not lower their demand. That is, spending was viewed as being constrained by the availability of credit, which was allocated by banks to their customers, to some extent, through nonprice means, i.e., through some kind of rationing scheme. Thus, the doctrine suggested an alternative transmission channel for monetary policy that was, to an important extent, based on a credit rationing argument.