Working Paper: CEPR ID: DP4452
Authors: Peter Temin; Hansjoachim Voth
Abstract: If in general, financial deepening aids economic growth, then financial repression should be harmful. We use a natural experiment ? the change in the English usury laws in 1714 ? to analyse the effects of interest rate restrictions. Based on a sample of individual loan transactions, we demonstrate how the reduction of the legal maximum rate of interest affected the supply and demand for credit. Average loan size and minimum loan size increased strongly, and access to credit worsened for those with little ?social capital?. While we have no direct evidence that loans were misallocated, the discontinuity in loan receipts makes this highly likely. We conclude that financial repression can undermine the positive effects of financial deepening; Britain?s disappointing growth during the period 1750-1850 may partly reflect the effects of harmful credit market regulation.
Keywords: banking; credit rationing; economic development; financial repression; lending decisions; natural experiments; usury laws
JEL Codes: G21; N23; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in maximum interest rate from 6% to 5% (E43) | Increase in average loan sizes (G51) |
| Reduction in maximum interest rate from 6% to 5% (E43) | Shift in lending patterns favoring wealthier borrowers (G51) |
| Tightening of usury laws (G21) | Greater discrimination against less privileged borrowers (G51) |
| Tightening of usury laws (G21) | Shift towards collateralized lending (G21) |
| Reduction in maximum interest rate from 6% to 5% (E43) | Distortion in the credit market (E44) |
| Tightening of usury laws (G21) | Undermining efficiency of financial intermediation (G21) |