It has been shown that models that assumed imperfect capital markets may have been much closer to the mark than those that, on the contrary, assumed perfect capital markets.
These studies have shown that capital markets that are competitive—in the sense that word is commonly used—may be characterized by credit and equity rationing. The models based on imperfect and costly information both provide explanations of institutional details of the capital market, details which are either inconsistent with perfect capital market models or about which perfect capital market models have nothing to say; but they also provide a basis of explanation of the many aspects of macro-economic (aggregate) behavior that seem inconsistent with the conventional neoclassical model.
In this first part of the book, we argue that monetary institutions and policy do have important real effects, but for reasons quite different from those of the standard theory. Our objective in these lectures is to explain both why it is that monetary policy is sometimes—effective, and why the conventional explanation of the mechanism by which it works—particularly those versions based on the transactions demand for money—is inadequate.
We should say at the outset that we are not denying that there might be some grain of truth in these conventional explanations, only that they miss the central aspects of the mechanisms by which monetary policy works, and therefore are an unreliable basis for the analysis of monetary policy.
Thank You For Reading The Critical Assumption: Perfect Capital Markets
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