Finance constraints, expectations, and macroeconomics

This study examines a new area of macroeconomic theory: the implications of the finance constraint approach to monetary theory. Hicks, Tsiang, Diamond, Howitt, Stockman, Kohn, Greenwald and Stiglitz, Helpman and Drazen, Svensson, Aoki and Liejonhufvud, and Woodford contribute papers which seek to understand monetary and macroeconomic issues in terms of financial market "imperfections". The incompleteness of financial markets and the existence of finance constraints provide an explanation for the sort of co-ordination problem that afflicts real-world economies, but is absent from simplistic New Classical models. In the presence of financial constraints, economies exhibit deviation-amplifying multipliers, non-pecuniary externalities and multiple self-fulfilling expectations equilibria. Even with rational expectations, optimizing behaviour and flexible prices, these papers argue that there may remain room for benign policy intervention of a Keynesian nature.