TY  - GEN
AB  - In this work, we aim to study the implications of the interest rate cap in an emerging economy. To do so we develop a two-period banking model with entrepreneurs that undertake risky projects and with formal and informal lenders. Entrepreneurs are heterogeneous in their level of net worth. We find that a cap on the lending interest rate excludes entrepreneurs with a low level of net worth, which in turn increases the participation of the informal credit market, but also might reduce bank markups increasing entrepreneurs' welfare. As a result, our model implies that the lower the market power of banks, the smaller the likelihood that the cap might have some positive impact on aggregate credit and investment.
AU  - Pozo, Jorge
CY  - Geneva
DA  - 2022
DA  - 2022
DO  - 10.71609/iheid-6nf4-4n53
DO  - doi
ID  - 300150
KW  - Development and Cooperation
KW  - Economies and Institutions
KW  - Finance and Investment
L1  - https://repository.graduateinstitute.ch/record/300150/files/HEIDWP16-2022.pdf
L2  - https://repository.graduateinstitute.ch/record/300150/files/HEIDWP16-2022.pdf
L4  - https://repository.graduateinstitute.ch/record/300150/files/HEIDWP16-2022.pdf
LK  - https://repository.graduateinstitute.ch/record/300150/files/HEIDWP16-2022.pdf
N2  - In this work, we aim to study the implications of the interest rate cap in an emerging economy. To do so we develop a two-period banking model with entrepreneurs that undertake risky projects and with formal and informal lenders. Entrepreneurs are heterogeneous in their level of net worth. We find that a cap on the lending interest rate excludes entrepreneurs with a low level of net worth, which in turn increases the participation of the informal credit market, but also might reduce bank markups increasing entrepreneurs' welfare. As a result, our model implies that the lower the market power of banks, the smaller the likelihood that the cap might have some positive impact on aggregate credit and investment.
PB  - Graduate Institute of International and Development Studies, International Economics Department
PP  - Geneva
PY  - 2022
PY  - 2022
T1  - Interest rate caps in an economy with formal and informal credit markets
TI  - Interest rate caps in an economy with formal and informal credit markets
UR  - https://repository.graduateinstitute.ch/record/300150/files/HEIDWP16-2022.pdf
Y1  - 2022
ER  -