Credit rationing, interest rates and capital accumulation

• Published in: Economic modelling 2011-11, Vol.28 (6), p.2719-2729
• Main Authors: Nabi, Mahmoud Sami, Suliman, Mohamed Osman
• Format: Article
• Language: English
• Subjects: Capital; Capital accumulation; Credit market; Credit rationing; Enforcement; Growth models; Interest rate; Interest rates; Investment decision; Manycountries; Rule of law; Studies
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2011.06.005

A simple endogenous growth model is developed to characterize credit rationing through the capital accumulation process. The model shows that credit rationing on investment loans decreases as capital accumulates and the enforcement cost decreases. We find that the evolution of the interest rate factor (lending interest rate/depositing interest rate) has a similar pattern to the credit rationing probability. However, simulations show that the evolution of the interest rate spread through the capital accumulation process depends on the degree of the enforcement cost. In the empirical part of the paper, we consider fifty-two countries, at different stages of development, over the period 1995–2005. We confirm the theoretical findings relative to the evolution of the interest rate spread and interest rate factor with capital accumulation. These results suggest that, for economies endowed with costly contract enforcement, the interest rate factor could be a better proxy of credit rationing than the interest rate spread. ► We model credit rationing and interest rates through the capital accumulation process. ► Rationing decreases as capital accumulates and enforcement cost decreases. ► The evolution of the interest spread depends on the enforcement cost. ► Interest factor dominates interest spread as proxy of credit rationing.