Thursday, September 05, 2013

IS-LM and bank lending

An old one but a golden look at IS-LM from Brad DeLong

S(Y - T) = BL(i; π, ρ)

with rho the parameter for the risk premium in the original. However, this could also be risk aversion and therefore bank lending (BL) could fail to expand to match savings S or may expand beyond savings in a boom.

The point made here is that the government borrowing (via bond market) increases the quality of borrowing.

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