Volume 43, Number 171,
October-December 2012
Credit Rationing:
A Perspective from New Keynesian Economics
Abigail Rodríguez and Francisco Venegas
INITIAL EXPLANATIONS OF CREDIT RATIONING

Works from the following authors were among some of the first research carried out on credit rationing: Roosa (1951), Wilson (1954), Kareken (1957), Hodgman (1960), Chase (1961), Miller (1962), Freimer y Gordon (1965), Jaffee and Modigliani (1969), Mason (1977), Baltensperger (1978) and Keaton (1979). Each of these presents a different concept of credit rationing, but they all serve as the foundation for later contributions.

The first interpretation of credit restricting was the doctrine of availability. In this approach, provided by Roosa (1951) and prevalent in the 1950s, credit is always restricted because granting it depends on the existence of resources to lend; if the monetary authority uses the quantity of money in the economy as a main instrument of control and decides to restrict it, the interest rate will consequently rise and the credit supply will drop, while demand may remain constant. Denying credit to those who apply for it by selecting among them using some mechanism besides price came to be known as credit rationing.

The pioneering works of Wilson (1954) and Kareken (1957) contribute some new elements. Wilson emphasizes that the phenomenon occurs when the price mechanism does not work; even if demand for credit is greater than supply, the imbalance persists because the lenders are unwilling to raise the interest rate, or are unable to do so due to limits greater than this rate imposed by the monetary authority. For Kareken, the credit supply depends on the current interest rate in the private market and the yield of public bonds. The increase in this last rate in combination with price rigidity in the private market leads to shrinking credit supply due to the preference of lenders towards public bonds. In this way, Kareken bases the rationing in the elasticity of the credit supply on the yield of public bonds and the low sensitivity of the credit demand to both rates.

Hodgman’s proposal (1960) is the basis for subsequent explanations that seek to explain the endogeneity of credit rationing. It tries to answer the following questions: Why does a rigid interest rate favor lenders? Why is credit rationing compatible with the behavior of maximizing benefits for creditors? Hodgman indicates that credit rationing occurs if there is greater demand for credit than supply given a certain interest rate. He distinguishes between traditional rationing (brought about due to the rigidity of the interest rate) and credit rationing. In the first case, the risk of the borrower defaulting causes interest rates to rise. That is, the entity applying for the credit offers to pay greater interest rates to compensate for the risk that the lender assumes. However, there is rationing when this rate is excessively or prohibitively high for the applicant.

On the other hand, credit rationing is related to the maximizing behavior of the lender because the lender observes the borrower’s payment capacity and not the borrower’s inclination to pay. Rationing occurs when the creditor decides to grant the resources that maximize the expected value of payments that the creditor will receive (capital and interest) as a function of the credit quality of the applicant and independently of the applicant’s willingness to pay. Formally, when a risk rate is established for an applicant, the lender grants credit amounts with an interest rate proportional to that magnitude. The credit limit is determined by the credit quality of the applicant. Once this limit is reached, successive increases in the interest rate cannot compensate for the risk of default.2

2 In Chase’s (1961) review of Hodgman’s (1960) work, he criticizes the assumption that the function of payment probability is independent from the amount borrowed and from the borrower’s promise to pay. Chase believes that the function of payment has a constant component that depends on the results generated with the activities that are the destination of the credit. Apparently, Chase’s appreciation is concentrated on emphasizing the need to consider the applicant’s actions in the rationing decision, and not on the borrower’s beliefs about these actions. Hodgman (1961) responds to this critique by indicating that the characteristics chosen for the function of payment respond to general criteria. Later on, Miller (1962) incorporates bankruptcy costs into Hodgman’s analysis. A fixed portion of these costs is associated with the size of credit, while another portion depends on the amount recovered. Miller believes that the lender’s net yield is subject to the following factors: size of credit, interest rate, bankruptcy costs, recovered portion of credit and probability of payment.

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Published in Mexico, 2012-2018 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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