Banking, Costly Credit, and Interest Rates with Limited Commitment

Hyung Sun Choi
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Hyung Sun Choi: Kyung Hee University

Korean Economic Review, 2025, vol. 41, 111-140

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.

Keywords: Banking; Costly Credit; Payment System; Interest Rates; Limited Commitment (search for similar items in EconPapers)
JEL-codes: E42 E44 E50 (search for similar items in EconPapers)
Date: 2025
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