With loan commitments negotiated in advance, the use of 'tight money'
to restrain nominal spending has asymmetric effects upon different cat
egories of borrowers. This can reduce efficiency, even though aggregat
e demand is stabilized. An equilibrium model of financial intermediati
on 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.