Abstract
With loan commitments negotiated in advance, the use of ‘tight money’ to restrain nominal spending has asymmetric effects upon different categories of borrowers. This can reduce efficiency, even though aggregate demand is stabilized. An equilibrium model of financial intermediation with loan commitments is developed, and used to analyze the welfare consequences of alternative monetary policies. If demand uncertainty relates primarily to the number of borrowers rather than to each one's demand for credit, an interest-rate smoothing policy is optimal.
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