Journal Article A Simple Neo-Keynesian Growth Model Get access John Williamson John Williamson London Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 37, Issue 2, April 1970, Pages 157–171, https://doi.org/10.2307/2296409 Published: 01 April 1970 Article history Received: 01 August 1968 Accepted: 01 May 1969 Published: 01 April 1970

A general equilibrium model of imperfectly competitive financial intermediaries is constructed and used to study the effects of some standard policy experiments. One-time increases in the growth rate and in the level of the stock of money have non-neutral (and sometimes surprising) effects on interest rates, the quantity of intermediated borrowing and lending, the number of intermediary firms, inflation and the price level. Optimal government macroeconomic policy is shown to reflect a tradeoff between public sector frictions and the capital market distortion created by increasing returns to scale and imperfect competition in private intermediation.

A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers' incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.