Joseph Stiglitz, live at the examination schools, part II
OK, all pretence of this being live will have to be abandoned. Not only am I writing about this a day later, I'm writing this having been to part III. Still here is part II, foundations of a new economics. No ambition here then...The lecture started by covering a number of market imperfections and their consequences. Most of these related to credit and equity rationing. The point of credit is that it lets you draw down future consumption for present use, however as any undergraduate student will testify trying to draw down future (uncertain) income is really rather hard. Since banks often don't know who is credit worthy a market imperfection ensues. While you can argue this causes the price of debt to rise and is otherwise insignificant in fact it makes it hard for investment to be channeled into poorly performing economies, especially when balance sheet effects (see below) are taken into account.
Current Chicago macroeconomic theory assumes that neither credit nor equity rationing will apply if a firm can demonstrate that it is a good investment. In fact the empirical evidence suggests there's plenty of it.
Other imperfections stem from cash flow and balance sheet effects. In particular, when a country devalues its currency debts owed and owing change dramatically. Firms who owe in foreign currency find themselves hugely in debt and unable to invest. This often affects domestic banks and credit rationing ensues.
New monetary ideas
Most transactions now take place on credit, so the cost of holding money and demand for money in the usual sense are actually extremely low. What's important is the supply of credit in the economy which depends heavily on how well informed banks are and how strong their balance sheets are.
It seems my notes aren't as good as I thought, so some of this may be a little garbled. The conclusion however I've written down as follows
"Taken together these theories suggest that markets are not self sdjusting. Fiscal policy can be expansionary"