Aggregate Output and Price Adjustment with Credit Rationing and Informal Loan Markets

Abstract

A macroeconomic model of output and price adjustment for a semi-industrialized developing country with informal loan markets is presented and tested. The model is based on the microfoundations of firm behaviour under monopolistic competition and bank credit rationing. Empirical results for three Latin American countries (Brazil, Colombia, and Peru) provide no support to the "cost push" effect of restrictive monetary policy, as recently emphasized in the literature.