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Credit rationing, interest rates and capital accumulation

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Listed author(s):
  • Nabi, Mahmoud Sami
  • Suliman, Mohamed Osman

Abstract

A simple endogenous growth model is developed to characterize credit rationing through the capital accumulation process. The model shows that credit rationing on investment loans decreases as capital accumulates and the enforcement cost decreases. We find that the evolution of the interest rate factor (lending interest rate/depositing interest rate) has a similar pattern to the credit rationing probability. However, simulations show that the evolution of the interest rate spread through the capital accumulation process depends on the degree of the enforcement cost. In the empirical part of the paper, we consider fifty-two countries, at different stages of development, over the period 1995–2005. We confirm the theoretical findings relative to the evolution of the interest rate spread and interest rate factor with capital accumulation. These results suggest that, for economies endowed with costly contract enforcement, the interest rate factor could be a better proxy of credit rationing than the interest rate spread.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 6 ()
Pages: 2719-2729

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2719-2729
DOI: 10.1016/j.econmod.2011.06.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

Keywords: Credit rationing; Capital accumulation; Interest rate; Rule of law;

Find related papers by JEL classification:

  • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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Cited by:

  1. Mikael C. Bergbrant & Delroy M. Hunter & Patrick J. Kelly, 2015. "Product Market Competition, Capital Constraints and Firm Growth," Working Papers w0215, Center for Economic and Financial Research (CEFIR).

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