ABSTRACT

This chapter determines the effects of imposing a ceiling on the interest rate banks can charge for loans. The imposition of a ceiling on the loan rate will in general have both aggregate and distributive effects. The conventional or naive model of the market for bank credit posits an aggregate demand for credit which is inversely related to the loan rate and an aggregate supply of deposits which is an increasing function of the rate of interest paid on deposits. Thus, the conventional model can shed little light on the distributive effects of a loan rate ceiling. The total supply of funds to the banking industry is assumed to be an increasing function of the interest rate paid on deposits. The conventional model of competitive credit market has been employed not only to analyze the effects of interest rate ceilings, but also to determine the impact of changes in underlying credit conditions when interest rates charged by banks are sticky.