The specification of the credit demand equation is based on a generally defined money demand function extended with in accordance with the conceptual approach outlined above. The demand for credit in general, as a form of money demand, can be assumed to depend on two main variables: the income or activity level and the cost of credit. In accordance with the discussion in section , we augment this basic specification with variables mirroring the adjustments in the firms’ balance sheets as well as such related to the specifics of this type of financial flows. .
