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More on Equilibrium Credit Rationing and Interest Rates: A Theory with New Evidence

In: Encyclopedia of Finance

Author

Listed:
  • Ying Wu

    (Salisbury University)

Abstract

In contrast to conventional understanding, an integrated theory of equilibrium credit rationing that allows restrictions on loan size as well as loan denials reveals a positive relationship between credit availability and interest rates when rationing by loan size (Gray, J. A. and Y. Wu, Journal of Macroeconomics 17: 405–420, 1995). This chapter uses the US bank lending practices from 1997 to 2010 as a quasi-natural experiment to test the interest rate hypothesis under loan-size rationing. Based on the vector error correction analysis of commercial and industrial loans made by the US domestic banks to large and middle-market firms, there is a cointegrating relation that sufficient tightness of credit market conditions (either an average loan size less than $888,880 or a net percentage of banks tightening loan standards greater than −11%) rescues a positive relationship between loan sizes and loan rates. The net percentage of tightening banks plays a pivotal role in interacting with the size of loans and the demand for loans to maintain such a long-run equilibrium relationship.

Suggested Citation

  • Ying Wu, 2022. "More on Equilibrium Credit Rationing and Interest Rates: A Theory with New Evidence," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 94, pages 2229-2249, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_96
    DOI: 10.1007/978-3-030-91231-4_96
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    More about this item

    Keywords

    Equilibrium credit rationing; Interest rate; Loan size; Cointegrating relation;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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