Interest Rate Caps in an Economy with Formal and Informal Credit Markets

Jorge Pozo

No 16-2022, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: In this work, we aim to study the implications of the interest rate cap in an emerging economy. To do so we develop a two-period banking model with entrepreneurs that undertake risky projects and with formal and informal lenders. Entrepreneurs are heterogeneous in their level of net worth. We find that a cap on the lending interest rate excludes entrepreneurs with a low level of net worth, which in turn increases the participation of the informal credit market, but also might reduce bank markups increasing entrepreneurs' welfare. As a result, our model implies that the lower the market power of banks, the smaller the likelihood that the cap might have some positive impact on aggregate credit and investment.

Keywords: Interest rate cap; Informal credit market; monopoly banks (search for similar items in EconPapers)
JEL-codes: E5 G21 G23 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2022-07-08
New Economics Papers: this item is included in nep-ban, nep-ent, nep-fdg, nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP16-2022.pdf (application/pdf)

Related works:
Working Paper: Interest Rate Caps in an Economy with Formal and Informal Credit Markets (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heidwp16-2022

Access Statistics for this paper

More papers in IHEID Working Papers from Economics Section, The Graduate Institute of International Studies Contact information at EDIRC.
Bibliographic data for series maintained by Dorina Dobre ().