Interest Rates in a Credit Constrained Economy

Abstract

When households face credit constraints in an economy with inside as well as outside money, stationary equilibrium real interest rates are below the household rate of time preference. They also depend significantly upon household risk aversion, the demand for inside versus outside money, bank costs, bank reserves, inflation, and the marginal productivity of capital and capital depreciation rates. In addition, changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.