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A Small Open Economy with Heterogenous Agents Facing Interest Rate Ceilings on Loans

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  • Arend, Mario

Abstract

The aim of this paper is to explore the effects of interest rate ceilings in a small open economy. In order to account for many individuals and lending, a model with heterogenous agents is considered. The investigation is focused on two issues: first, how effective are interest rate ceilings at reducing loans and risk in the economy and at what cost; and second, whether imposing interest rate limits produce any different response of the variables to aggregate shocks in the economy. The results obtained from the model show that interest rate ceilings are effective at reducing high risk debt in the financial system. The cost on consumption of reducing this risk is minimum in the model. The findings for the second issue show that interest rate ceilings make debt more responsive to shocks on the interest rates. In particular, the effect in percentage points of an increase of interest rates could be twice as negative on debt under interest rate ceilings.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19427.

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Date of creation: 18 Dec 2009
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Handle: RePEc:pra:mprapa:19427

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Related research

Keywords: Small open economy; Heterogenous Agents; Incomplete markets; Interest rate ceilings; Financial frictions; Numerical solutions.;

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  1. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  2. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  3. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  4. Tobin, James, 1970. "Deposit Interest Ceilings as a Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(1), pages 4-14, February.
  5. Marco A. Espinosa-Vega & Bruce D. Smith, 2001. "Socially excessive bankruptcy costs and the benefits of interest rate ceilings on loans," Working Paper 2001-27, Federal Reserve Bank of Atlanta.
  6. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December.
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