THE AVAILABILITY OF CREDIT AND CORPORATE INVESTMENT

UNTIL RECENTLY most economists agreed that Federal Reserve monetary policy had little effect on real-spending decisions. This opinion-supported by a considerable empirical literature-was based on two allegations: (1) that the Federal Reserve has little effect on interest rates, and (2) that interest rates are not a significant factor in decisions concerning consumption or investment expenditures. Perhaps the most interesting counterargument is the notion that Federal Reserve credit policy operates in the economy not through its effect on borrowers, but through its effects on lenders. This has become known as the Availability Doctrine. Although the doctrine's first formal statement is only about 20 years old, its origin goes back to the 1920's. Recently it has undergone criticism which has considerably improved its rigor. Given that this hypothesis remains generally accepted by both central bankers and commercial bankers, it seems desirable to study it in detail. This is the purpose of this work. The study seeks answers to two basic questions: (1) Is the Availability Doctrine based on assumptions consistent with the usual postulates of rational decisionmaking? (2) What is the effect of availability limitations on the spending plans of economic units? The first question can be answered in the affirmative. An explanation of non-price rationing of credit is sought with considerable success in the study of (a) decisionmaking under conditions of uncertainty and (b) relationships among firms in a market characterized by imperfect competition. However, this discussion leads to the conclusion that availability effects are likely to affect small firms but not large. This is not surprising given the facts that higher risk is associated with smaller firms and that imperfectly competitive markets tend to favor the larger establishments. The answer to the second question requires that credit rationing be measured empirically. However, a direct measure of the extent on non-price rationing in credit markets is impossible since the variable sought-the amount of credit desired but not received-is not observable. This necessitates the use of a proxy variable that could be expected to move in a predictable manner when rationing appears. A number of variables that might be correlated with rationing are factor-analyzed in the hope that a common factor could be found to identify with rationing effects. The most-promising series extracted relates mainly to the percentage of new bank loans being granted to large firms. This is in accordance with the argument that the mostplausible explanations for rationing imply discrimination against small firms. The research concludes with studies of plant and equipment investment and of inventory accumulation by manufacturing firms. Investment data published by the Department of Commerce and the National Industrial Conference Board make it possible to break down investment expenditures into two broad asset-size categories. The FTC-SEC Quarterly Financial Reports give sales, inventories, and balance sheets of manufacturers in the same asset-size classes. Three interesting differences between small-firm and large-firm behavior emerge: