Continue or cease? A method to identify credit constraints under policy intervention and an implication for policy efficiency

Yusuke Fushiki and Katsuhiro Saito

Applied Economics, 2022, vol. 54, issue 58, 6716-6725

Abstract: In this study, we consider the problem whereby policy intervention in the financial market might hide the existence of credit constraints. We develop a theoretical model of the representative borrower utilizing credit from private banks and a governmental financial institution. Using the exogenous change in the transaction technology for borrowing from the governmental institution, we can identify the existence of credit constraints even if the policy remains in the market. Additionally, our model shows that the inefficiency of policy intervention is larger when we consider the borrower’s choice of optimal effort.

Date: 2022
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DOI: 10.1080/00036846.2022.2081662

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