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Credit, Money, and Aggregate Demand

18 Pages Posted: 27 Apr 2000 Last revised: 22 Jan 2002

Ben S. Bernanke

Board of Governors of the Federal Reserve System

Alan S. Blinder

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1988


Standard models of aggregate demand treat money and credit asymmetrically; money is given a special status, while loans, bonds, and other debt instruments are lumped together in a "bond market" and suppressed by Walras' Law. This makes bank liabilities central to the monetary transmission mechanism, while giving no role to bank assets. We show how to modify a textbook IS-UI model so as to permit a more balanced treatment. As in Tobin (1969) and Brunner-Meltzer (1972), the key assumption is that loans and bonds are imperfect substitutes. In the modified model, credit supply and demand shocks have independent effects on aggregate demand; the nature of the monetary transmission mechanism is also somewhat different. The main policy implication is that the relative value of money and credit as policy indicators depends on the variances of shocks to money and credit demand. We present some evidence that money-demand shocks have become more important relative to credit-demand shocks during the 1980s.

Suggested Citation

Bernanke, Ben S. and Blinder, Alan S., Credit, Money, and Aggregate Demand (March 1988). NBER Working Paper No. w2534. Available at SSRN:

Ben Bernanke (Contact Author)

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alan Blinder

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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