ABSTRACT
This chapter shows that if credit is rationed by restricting the size of loans rather than the number of loans, interest rates may actually fall as credit becomes tighter. When rationing occurs, increased credit market tightness will cause both the loan rate charged by intermediaries and the deposit rate paid by intermediaries to decline. The chapter discusses the rationale for two of the important choices made in developing the partial equilibrium framework. One choice concerns the rationing regimes, which is considered in this research, a choice restricted to rationing either by loan size or by number. The other involves the interaction between firms and intermediaries, where, in modelling the intermediary's behavior, this study assumes that the firm's behavior is price-taking rather than utility-taking. The literature as it now stands is broadly construed to show that equilibrium credit rationing predicts invariance of interest rates with respect to credit supply.
