Journal Article

Interest rates, risk, and imperfect markets: puzzles and policies

JE Stiglitz

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 15, issue 2, pages 59-76
Published in print June 1999 | ISSN: 0266-903X
Published online June 1999 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/15.2.59
Interest rates, risk, and imperfect markets: puzzles and policies

More Like This

Show all results sharing these subjects:

  • Economic Development and Growth
  • Public Economics
  • Political Economy
  • Public Policy

GO

Show Summary Details

Preview

Traditional theory emphasizes the key role that monetary policy can play through the manipulation of interest rates. But there are several puzzles that cannot be reconciled with standard models. These include: the apparent constancy in interest rates over extended periods, and changes at other times which appear unrelated to changes in technology and demography; the cyclical pattern of movements in real interest rates; the impact of nominal not real interest-rate changes on real variables; and the cyclical pattern of movements in interest-rate spreads. This paper reaches beyond the standard competitive equilibrium, perfect information, model of credit markets towards imperfect information models, particularly those that focus on the determinants of bank behaviour. Of the standard models, the money demand model is most deficient in understanding these puzzles. The loanable funds theory and a generalized version of real productivity theory can be reconciled with imperfect information, and markets and the consequent credit and equity rationing regimes help to explain the puzzles. Specifically, banks may be insensitive to changes in monetary stance owing to risk aversion. There are strong policy implications; it is argued, for instance, that in East Asia raising interest rates exacerbated economic decline and, rather than contributing to exchange-rate stability, may have induced capital flight as default risk increased, lowering risk-adjusted expected returns.

Journal Article.  0 words. 

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.