Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266130 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
Graduate Institute of International and Development Studies Working Paper No. HEIDWP16-2022
Publisher: 
Graduate Institute of International and Development Studies, Geneva
Abstract: 
In this work, we aim to study the implications of the interest rate cap in an emerging economy. To do so we develop a two-period banking model with entrepreneurs that undertake risky projects and with formal and informal lenders. Entrepreneurs are heterogeneous in their level of net worth. We find that a cap on the lending interest rate excludes entrepreneurs with a low level of net worth, which in turn increases the participation of the informal credit market, but also might reduce bank markups increasing entrepreneurs' welfare. As a result, our model implies that the lower the market power of banks, the smaller the likelihood that the cap might have some positive impact on aggregate credit and investment.
Subjects: 
Interest rate cap
Informal credit market
monopoly banks
JEL: 
E5
G21
G23
Document Type: 
Working Paper

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