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Credit Market Imperfections, Financial Activity and Economic Growth

  • Been-Lon Chen

    (Academia Sinica)

  • Yeong-Yuh Chiang

    (National Chengchi University)

  • Ping Wang


    (Department of Economics, Vanderbilt University)

This paper develops a dynamic general-equilibrium model with production to examine the inter-relationships between the real and the financial sectors with and without credit market imperfections. Due to the moral hazard problem, credit rationing may be present, which is associated with a widened financial spread and low effective bank loans, compared to the unconstrained equilibrium. Credit rationing causes both the loan and the deposit rates to rise. In a generalized framework with intergenerational human capital accumulation, credit rationing discourages education investment and reduces output growth. In either unconstrained or constrained equilibrium, the long-run effects of a productivity improvement on real financial activities depends crucially on where it is originated.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0020.

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Date of creation: Jun 2000
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Handle: RePEc:van:wpaper:0020
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