The Macroeconomics of Imperfect Capital Markets: Whither Saving-Investment Imbalances?

  • Roberto Tamborini
Part of the Contributions to Economics book series (CE)


Starting with Wicksell and until the heyday of Keynesian economics, inflation, unemployment and business cycles were thought and taught mainly as problems originating from “saving-investment imbalances” due to some form of malfunctioning of the capital market. Whereas modern studies of imperfect capital markets have greatly improved our understanding of capital market failures, their impact on macroeconomics has remained surprisingly limited. The macroeconomic consequences of saving-investment imbalances are still undeveloped in this literature. The most popular macroeconomic model to date – the so-called New Neoclassical Synthesis – dispenses with capital market imperfections altogether. The aim of this paper is to fill this gap. After an overview of the historical foundations and the current state of the macroeconomics of imperfect capital markets, the paper presents a competitive, flex-price model of saving-investment imbalances where deviations of the market interest rate from the Wicksellian natural rate generate (disequilibrium) business cycles. Then the model is extended to make the market interest rate endogenous and to allow preliminary considerations to be made about monetary policy and the control of the interest rate over the business cycle.


Interest Rate Monetary Policy Capital Market Central Bank Real Interest Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



I wish to thank Axel Leijonhufvud, Vela Velupillai, Edoardo Gaffeo, Andrea Fracasso, Ronny Mazzocchi and Hans Michael Trautwein for helpful discussions and comments. Financial support is acknowledged to the Italy-Germany Inter-Univeristy “Vigoni Programme,” 2006–2007.


  1. Allen F, Gale D (2001) Comparing financial systems. MIT Press, Cambridge MAGoogle Scholar
  2. Amendola M., Gaffard JL (1998) Out of equilibrium Clarendon Press, OxfordGoogle Scholar
  3. Bernanke B, Blinder A (1988) Credit, money, and aggregate demand, Papers and Proceedings of the American Economic Association. Am Econ Rev 78:435–439Google Scholar
  4. Bernanke B, Gertler M (1989) Agency costs, net worth and business fluctuations. Am Econ Rev 79:14–31Google Scholar
  5. Bernanke B, Gertler M (1990) Financial fragility and economic performance. Q J Econ 105:87–114CrossRefGoogle Scholar
  6. Bernanke B, Gertler M (1995) Inside the black box: the credit channel of monetary policy transmission. J Econ Perspectives 9:27–42Google Scholar
  7. Bernanke B, Gertler M (2001) Should central banks respond to movements in asset prices?, Papers and Proceedings of the American Economic Association. Am Econ Rev 91:253–257CrossRefGoogle Scholar
  8. Bernanke B, Gertler M, Gilchrist S (1996) The financial accelerator and the flight to quality. Rev Econ Stat 78:1–15CrossRefGoogle Scholar
  9. Blanchard OJ (2000) What do we know about macroeconomics that Fisher and Wicksell did not know?. Q J Econ 115:1375–1409CrossRefGoogle Scholar
  10. Blanchard OJ, Galì J (2005) Real wage rigidity and the new Keynesian model. MIT Department of Economics, Working Paper Series, 05–28Google Scholar
  11. Boianovsky M, Trautwein M (2004) Wicksell after Woodford, Paper presented at the History of Economics Society meeting, Toronto, JuneGoogle Scholar
  12. Boianovsky M, Trautwein M (2006) Price expectations, capital accumulation and employment: Lindahl’s macroeconomics from the 1920s to the 1950s. Camb J Econ 17:1–20Google Scholar
  13. Bond S, Jenkinson T (1996) The assessment: investment performance and policy. Oxf Rev Econ Pol 12:1–33CrossRefGoogle Scholar
  14. Bordo MD, Jeanne O (2002) Boom-busts in asset prices, economic instability, and monetary policy. NBER Working Paper, 8966Google Scholar
  15. Borio C, Lowe P (2002) Asset prices, financial and monetary stability: exploring the Nexus. BIS Working Papers, 114Google Scholar
  16. Caresma JC, Gnan E, Ritzberger-Gruenwald D (2005) The natural rate of interest. concepts and appraisal for the Euro area. Monetary Policy and the Economy, Austrian National Bank, Q4Google Scholar
  17. Cecchetti SG, Genberg H, Lipsky J, Wadwhani S (2000) Asset prices and central bank policy, Internationa Centre for Monetary and Banking Studies, LondonGoogle Scholar
  18. Chiarella C, Flaschel P, Franke R (2005) Foundations for a disequilibrium theory of the business cycle. Cambridge University Press, Cambridge UKCrossRefGoogle Scholar
  19. De Meza D, Webb DC (1987) Too much investment: a problem of asyymetric information. Q J Econ 102:181–192CrossRefGoogle Scholar
  20. Delli Gatti D, Tamborini R (2000) Imperfet capital markets: a new macroeconomic paradigm?. In: Backhouse R, Salanti A (eds) Macroeconomics and the real world, vol II. Oxford University Press, OxfordGoogle Scholar
  21. Demirguç-Kunt A, Levine R (eds) (2001) Financial structure and economic growth. MIT, Cambridge MAGoogle Scholar
  22. Evans GW, Honkapohja S (2001) Learning and expectations in macroeconomics. Princeton University Press, PrincetonGoogle Scholar
  23. Fazzari S, Hubbard RG, Petersen B (1988) Financing constraints and corporate investment. Brookings Papers Econ Activ 1:141–206CrossRefGoogle Scholar
  24. Fitoussi JP (2001) Monetary policy and the macroeconomics of soft growth. In: Leijonhufvud A (ed) Monetary theory and policy experience. Palgrave, LondonGoogle Scholar
  25. Garnier J, Wihelmsen B (2005) The natural real interest and the output gap in the Euro area. A joint estimation. European Central Bank, Working Paper Series, 546Google Scholar
  26. Gertler M (1988) Financial structure and aggregate activity: an overview. J Money Credit Bank 20:559–588CrossRefGoogle Scholar
  27. Gertler M, Gilchrist S (1993) The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence. Scand J Econ 93:43–64Google Scholar
  28. Gertler M, Hubbard RG (1988) Financial factors in business fluctuations. In: Federal Reserve Bank of Kansas City. Financial Market Volatility, Kansas CityGoogle Scholar
  29. Greenwald BC, Stiglitz JE (1988) Imperfect information, finance constraints and business fluctuations In: Kohn M, Tsiang SC (eds) Finance constraints, expectations and macroeconomics. Clarendon Press, OxfordGoogle Scholar
  30. Greenwald BC, Stiglitz JE (1990) Macroeconomic models with equity and credit rationing. In: Hubbard RG (ed) Information, capital markets and investment., Chicago University Press, ChicagoGoogle Scholar
  31. Greenwald BC, Stiglitz, JE (1991) Towards a new paradigm in monetary economics. Cambridge University Press, CambridgeGoogle Scholar
  32. Greenwald BC, Stiglitz JE (1993a) Financial market imperfections and business cycles. Q J Econ 108:77–113CrossRefGoogle Scholar
  33. Greenwald BC, Stiglitz JE (1993b) New and old Keynesians. J Econ Perspectives 7:23–44Google Scholar
  34. Hart O (1995) Firms, contracts and financial structure. Clarendon Press, OxfordCrossRefGoogle Scholar
  35. Jaffee D, Stiglitz J (1990) Credit rationing. In: Friedman BM, Hahn FH (eds) Handbook of monetary economics. North Holland, AmsterdamGoogle Scholar
  36. Keynes JM (1930) A treatise on money. Macmillan, LondonGoogle Scholar
  37. Keynes JM (1936) The general theory of employment, interest and money. Macmillan, LondonGoogle Scholar
  38. Keynes JM (1937a) Alternative theories of the rate of interest. Econ J 47:241–252CrossRefGoogle Scholar
  39. Keynes JM (1937b) The ex-ante theory of the rate of interest. Econ J 47:663–669CrossRefGoogle Scholar
  40. Keynes JM (1937c) The general theory of employment. Q J Econ 14:109–123Google Scholar
  41. Kiyotaki N, Moore J (1997) Credit cycles. J Polit Econ 105:211–248CrossRefGoogle Scholar
  42. Leijonhufvud A (1981) The Wicksell connection. variations on a theme. In: Information and coordination: essays in macroeconomic theory. Oxford University Press, New YorkGoogle Scholar
  43. Leijounhufvud A (1983) What was the matter with IS-LM?. In: Fitoussi JP (ed) Modern macroeconomic theory. Blackwell, OxfordGoogle Scholar
  44. Lindahl E (1939) Studies in the theory of money and capital. George Allen and Unwin, LondonGoogle Scholar
  45. Leland H, Pyle D (1977) Informational asymmetries, financial structure and financial intermediation. J Finance 32:371–387CrossRefGoogle Scholar
  46. McCallum BT (1986) Some issues concerning interest rate pegging, price level indeterminacy, and the real bills doctrine. J Monetary Econ 17:135–160CrossRefGoogle Scholar
  47. Minsky HP (1972) An exposition of a keynesian theory of investment. In: Can it happen again? essays on instability and finance. Sharpe, New York, 1982Google Scholar
  48. Minsky HP (1975) John Maynard Keynes. Basic Books, New YorkGoogle Scholar
  49. Modigliani F, Miller M (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48:261–277Google Scholar
  50. Moggridge D (ed) (1987) The collected writings of John Maynard Keynes, vol XIV, Part II, 2nd ed. Macmillan, LondonGoogle Scholar
  51. Myers M, Majluf N (1984) Corporate financial decisions when firms have information that investors do not have. J Financ Econ 13:187–220CrossRefGoogle Scholar
  52. Orphanides A, Williams JC (2002) Robust monetary policy rules with unknown natural rates. Brookings Papers Econ Activ 2:63–118CrossRefGoogle Scholar
  53. Orphanides A, Williams JC (2006) Inflation targeting under imperfect knowledge. CEPR, Discussion Paper Series, 5664Google Scholar
  54. Stiglitz JE (1982) Information and capital markets. In: Sharpe WF, Cootner CM (eds) Financial economics. Prentice Hall, New JerseyGoogle Scholar
  55. Stiglitz JE (1987) The causes and consequences of the dependence of quality on price. J Econ Lit 25:1–48Google Scholar
  56. Stiglitz JE (1992) Capital markets and economic fluctuations in capitalist economies. Paper and Proceedings of the European Economic Association. Eur Econ Rev 36:269–306Google Scholar
  57. Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71:393–410Google Scholar
  58. Stiglitz JE, Weiss A (1992) Asymmetric information in credit markets and its implications for macroeconomics. Oxf Econ Papers 44:694–724Google Scholar
  59. Svensson L (1997) Inflation forecast targeting. implementing and monitoring inflation targets. Eur Econ Rev 41:1111–1147CrossRefGoogle Scholar
  60. Tamborini R (2001) Mercati finanziari e attività economica Padova: CEDAMGoogle Scholar
  61. Tamborini R (2007) Back to Wicksell? Some lessons for practical monetary policy Money, macro and finance conference. University of Birmingham, 12–14Google Scholar
  62. Van der Ploeg F (2005) Back to Keynes?. CEPR. Discussion Paper Series 4897Google Scholar
  63. Wicksell K (1898a) Interest and prices. Macmillan, London, 1936Google Scholar
  64. Wicksell K (1898b) The influence of the rate of interest on commodity prices, In: Lindahl E (ed) Wicksell: Selected papers in economic theory. Allen and Unwin, London, 1958Google Scholar
  65. Wicksell K (1922) Vorlesungen ueber Nationaloekonomie, Band 2. Gustav Fischer, JenaGoogle Scholar
  66. Woodford M (2001) The taylor rule and optimal monetary policy. Princeton University, mimeoGoogle Scholar
  67. Woodford M (2003) Interest and prices. Foundations of a theory of monetary policy. Princeton University Press, PrincetonGoogle Scholar

Copyright information

© Springer Physica-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of TrentoTrentoItaly

Personalised recommendations