Credit market imperfections and economic development: Theory and evidence

Bruce D. Smith

38 citations0/0 files storedJournal of Development Economics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

A model of credit markets in which there is a costly-state-verification problem is integrated into a neoclassical growth model. The presence of a credit market friction gives rise to credit rationing, which in turn impacts on the growth path of an economy. The model delivers predictions about the co-movements between per capita income, credit rationing, interest rates, and factor prices. The implications of the model are generally empirically supported in U.S. and Taiwanese data. The model also makes predictions about the consequences of government regulation of credit markets which are supported by the Taiwanese data.

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References

1981Credit Rationing in Markets with Imperfect Information 1988Agency Costs, Net Worth, And Business Fluctuations 1974Money and Capital in Economic Development.1979Optimal contracts and competitive markets with costly state verification 1974Shaw, Edward S., Financial Deepening in Economic Development, New York, Oxford University Press, 1973, xii + 260 pp. ($7.50 cloth, $3.50 paper)1985Incentive-Compatible Debt Contracts: The One-Period Problem 1985Good-bye financial repression, hello financial crash 1986Agency Costs, Collateral, and Business Fluctuations

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