Credit, Capital Flows and Monetary Policy A Post-Keynesian Analysis

Main Article Content

Nazim Kadri Ekinci

Abstract

The credit channel literature implicitly relies on the fact that capital spending requires and depends on financing and that credit is the main form of financing. The mainstream model tries to avoid this implication by recourse to artificial concepts and variables such as the “external finance” premium. We, by contrast, explicitly model capital expenditures as a function of the credit volume along with other relevant variables. This formulation has roots in the Post-Keynesian logico-temporal ordering of production and the realization of income. The inclusion of credit in expenditure functions result in a simple income determination model making the roles of credit and monetary policy transparent. A financial block is added to the model to determine the interest rates and credit aggregates. Principles of consistent macro modelling on Post-Keynesian principles are carefully delineated. In particular, the principle of Keynesian dichotomy and necessity of an appropriate lead-lag structure in simultaneous equation models compatible with the logico-temporal ordering of production is stressed. A comparative static/dynamic example based on the model demonstrates the ability of the model in generating a reasonable account of possible outcomes in response to changes to underlying conditions.

Downloads

Download data is not yet available.

Article Details

How to Cite
Ekinci, N. (2018). Credit, Capital Flows and Monetary Policy. World Journal of Applied Economics, 4(2), 55-74. https://doi.org/10.22440/wjae.4.2.1
Section
Articles
Author Biography

Nazim Kadri Ekinci, University of Kurdistan Hewler

Nazım Ekinci received his Ph.D. degree from Ankara University Department of Economics in 1988. During and after his doctorate, he worked at the Middle East Technical University (1981-2004), Pamukkale University (2004-2007) and University of Kurdistan (2007-2010). He is currently professor at the Harran University. His main areas are monetary policy, Turkish economy and crises. He is the editorial board member of EconWorld since 2014.

References

Alper, K., Binici, M., Demiralp, S., Kara, H., & Ozlu, P. (2016). Reserve Requirements, Liquidity Risk, and Bank Lending Behavior (Working Paper Series No. 1612). Koc University-TUS_IAD Economic Research Forum (ERF). http://hdl.handle.net/10419/166736.

Bernanke, B. S., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9 (4), 27-48. http://dx.doi.org/10.1257/jep.9.4.27

Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2017). Are Capital In ows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence. IMF Economic Review, 3 (65), 563-585. http://dx.doi.org/10.1057/s41308-017-0039-z

Borio, C., & Disyatat, P. (2015). Capital Flows and the Current Account: Taking Financing (more) Seriously (Working Papers No. 525). Bank for International Settlements (BIS). https://www.bis.org/publ/work525.pdf.

Borio, C., & Zhu, H. (2012). Capital Regulation, Risk-taking and Monetary Policy: A Missing Link in the Transmission Mechanism? Journal of Financial Stability , 8 (4), 236-251. http://dx.doi.org/10.1016/j.jfs.2011.12.00

Claessens, S., & Kose, M. A. (2017). Macroeconomic Implications of Financial Imperfections: Survey (Policy Research Working Paper No. 8260). World Bank, Washington,DC. World Bank. http://hdl.handle.net/10986/28921.

Gali, J. (2008). Monetary Policy, Inflation, and the Business Cycle, An Introduction to the New Keynesian Framework. Princeton University Press. Princeton, New Jersey.

Keynes, J. M. (1930). Treatise on Money, Volume I: The Pure Theory of Money. MacMillan and Co. Limited. St. Martin's Street, London. Retrieved from https://ia801608.us.archive.org/27/items/in.ernet.dli.2015.45480/2015.45480.A-Treatise-On-Money--Vol1.pdf

Keynes, J. M. (1937). The ex-ante" Theory of the Rate of Interest. The Economic Journal,47 (188), 663-669. http://dx.doi.org/10.2307/2225323

Lavoie, M. (1984). The Endogenous Flow of Credit and the Post Keynesian Theory of Money. Journal of Economic Issues, 18 (3), 771-797. http://dx.doi.org/10.1080/00213624.1984.11504274

Pasinetti, L. L. (1979). Growth and Income Distribution: Essays in Economic Theory. Cambridge University Press.

Rochon, L.-P., & Rossi, S. (2007). Central Banking and Post-Keynesian Economics. Review of Political Economy, 19 (4), 539-554. http://dx.doi.org/10.1080/09538250701622402

Rowthorn, R. E. (1977). Conflict, Inflation and Money. Cambridge Journal of Economics, 1 (3), 215-239. http://dx.doi.org/10.1093/oxfordjournals.cje.a035360

Wolfson, M. H. (1996). A Post Keynesian Theory of Credit Rationing. Journal of Post Keynesian Economics, 18 (3), 443-470. http://dx.doi.org/10.1080/01603477.1996.11490081