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Liquidity constraints in commercial loan markets with imperfect information and imperfect competition

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Listed author(s):
  • Stacey L. Schreft
  • Anne P. Villamil

Abstract

This paper presents a simple general equilibrium model of the commercial loan market in which liquidity constraints arise endogenously because of imperfect information and imperfect competition. The information and market structure generate a discriminatory interest rate schedule and loan size restrictions, which we interpret as liquidity constraint phenomena. The model's predictions are consistent with actual lending policies observed in the commercial loan industry. Further, the lender and all borrowers are at least as well off under this solution as they would be if faced with any single interest rate policy other than the competitive rate.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 90-10.

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Date of creation: 1990
Handle: RePEc:fip:fedrwp:90-10
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Keywords: Liquidity (Economics) ; Bank loans;

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