Quantity Rationing of Credit and the Phillips Curve George A. Waters ∗ Department of Economics Campus Box 4200 Illinois State University Normal, IL 61761-4200 September 10, 2013 Abstract Quantity rationing of credit, when some firms are denied loans, has macroeconomic effects not fully captured by measures of borrowing costs. This paper develops a monetary DSGE model with quantity rationing and derives a Phillips Curve relation where inflation dynamics depend on excess unemployment, a risk premium and the fraction of firms receiving financing. Excess unemployment is defined as that which arises from disruptions in credit flows. GMM estimates using data from a survey of bank managers confirms the importance of these variables for inflation dynamics. Keywords: Quantity Rationing, Phillips Curve, Unemployment, GMM JEL Codes: E24, E31, E51 ∗ gawater@gmail.com 1