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 -