ARTICLE CRITIQUE: CREDIT, MONEY, AND AGGREGATE DEMAND
This research critiques the article "Credit, Money, and Aggregate Demand," by Ben S. Bernanke and Alan S. Blinder.* In the article, the authors develop and test a variant to the IS/LM model (p. 435). The particular focus in the article is a change in the way bank loans are treated in analyses of the demand for money (p. 435).
In the early traditions of classical economic theory, the rate of interest was regarded simply as the rate of return on capital invested. At this time, interest, as income on capital, was considered to be analogous to rent on land.
As classical economic theory developed, however, the nature of interest, and the determinants of interest rates began to be perceived in more complex terms. Classical economic theory eventually held that interest rates were determined by forces affecting the supply of and demand for funds. The demand for funds was held by classical economic theory to derive from the expectations of business with respect to profits. In turn, the expectations of business with respect to profits were held to be a function of the marginal productivity of investment.
The supply of funds, on the other hand, was held by classical economic theory to be dependent upon the aggregate willingness in an economy to save. In turn, the aggregate willingness to save was held to be a function of the marginal rate of time preference for funds.
*Ben S. Bernanke and Alan S. Blinder, "Credit, Money, and Aggregate Demand," American Economic Review, 78 (May 1988): 435 439. In the context of the theory of interest, investment refers to expenditures on capital goods. The marginal productivity of investment refers to the internal rate of return, or break even point, for a capital investment. Thus, if the interest rate at which funds are available were lower than the internal rate of return for a capital investment, business would expect that a profit...