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Banking, Costly Credit, and Interest Rates with Limited Commitment

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  • Hyung Sun Choi

    (Kyung Hee University)

Abstract

A model for banking is constructed to explore the role of a payment system with limited commitment as another determinant of a spread between the loan and deposit rates. Limited commitment constrains credit settlements. In equilibrium, collateral is required in the payment system and affects the loan rate, the distribution of money, consumption, and output. The optimal policy mix minimizes the interest rate spread and increases output. The Friedman rule is generally not optimal.

Suggested Citation

  • Hyung Sun Choi, 2025. "Banking, Costly Credit, and Interest Rates with Limited Commitment," Korean Economic Review, Korean Economic Association, vol. 41, pages 111-140.
    • Handle: RePEc:kea:keappr:ker-20250101-41-1-04
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    References listed on IDEAS

    as
    1. Valerie R. Bencivenga & Gabriele Camera, 2011. "Banking in a Matching Model of Money and Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 449-476, October.
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    3. repec:dau:papers:123456789/7353 is not listed on IDEAS
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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