Working Paper: NBER ID: w2164
Authors: Joseph E. Stiglitz; Andrew Weiss
Abstract: In this paper we investigate the macro-economic equilibria of an economy in which credit contracts have both adverse selection and incentive effects. The terms of credit contracts include both an interest rate and a collateral requirement. We show that in this richer model all types of borrowers may be rationed. Interest rates charged borrowers may move either pro or counter-cyclically. If pro-cyclical shocks have a greater effect on the success probabilities of risky techniques than on safe ones, then the interest rate offered depositors may also move counter-cyclically. Finally, we show that the impact of monetary policy on the macro-economic equilibrium is affected by whether or not the economy is in a regime in which credit is rationed.
Keywords: Credit rationing; Macroeconomic equilibrium; Adverse selection; Moral hazard; Monetary policy
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher interest rates (E43) | Increase in the proportion of high-risk borrowers (G21) |
| Increasing collateral requirements (G21) | Reduce willingness of borrowers to take risks (G21) |
| Credit rationing (G21) | Affect access to funds for all risk classes (G22) |
| Monetary policy (E52) | Credit market conditions (E44) |
| Higher interest rates (E43) | Tighter credit conditions (E51) |
| Increasing collateral requirements (G21) | Tighter credit conditions (E51) |