ON EQUILIBRIUM CREDIT RATIONING AND INTEREST-RATES

In many recent studies of equilibrium credit rationing, rationing takes the form of restrictions on the number of loans an intermediary makes. These studies conclude that when rationing occurs, interest rates will be invariant with respect to credit supply. We show that if credit is rationed by restricting the size of loans rather than the number of loans, tighter credit can cause interest rates to fall. This finding suggests a role for credit rationing in explaining the difficulty of empirically verifying a negative relationship between interest rates and investment, and points to rationing as a factor that may act to destabilize credit markets.