More on Equilibrium Credit Rationing and Interest Rates: A Theory with New Evidence

Ying Wu ()
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Ying Wu: Salisbury University

Chapter 94 in Encyclopedia of Finance, 2022, pp 2229-2249 from Springer

Abstract: Abstract In contrast to conventional understanding, an integrated theory of equilibrium credit rationing that allows restrictions on loan size as well as loan denials reveals a positive relationship between credit availability and interest rates when rationing by loan size (Gray, J. A. and Y. Wu, Journal of Macroeconomics 17: 405–420, 1995). This chapter uses the US bank lending practices from 1997 to 2010 as a quasi-natural experiment to test the interest rate hypothesis under loan-size rationing. Based on the vector error correction analysis of commercial and industrial loans made by the US domestic banks to large and middle-market firms, there is a cointegrating relation that sufficient tightness of credit market conditions (either an average loan size less than $888,880 or a net percentage of banks tightening loan standards greater than −11%) rescues a positive relationship between loan sizes and loan rates. The net percentage of tightening banks plays a pivotal role in interacting with the size of loans and the demand for loans to maintain such a long-run equilibrium relationship.

Keywords: Equilibrium credit rationing; Interest rate; Loan size; Cointegrating relation (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_96

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DOI: 10.1007/978-3-030-91231-4_96

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