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

Figure 1 illustrates credit rationing as conceived of by Hodgman. The left side shows the positive decreasing relationship of the expected yield for loan r. With respect to the interest rate i, at the start, the expected yield increases with the interest rate, but there is a maximum limit. Later increases in the interest rate even reduce the borrower’s yield by raising the risk of default. The relationship between expected yield and the interest rate explains the shape of the credit supply curve Cr s (right side). In case A1, given the risk rating of the applicant, credit demand and supply coincide. The credit Cr1 is granted with an expected yield rate of r1. In A2, the risk rating is associated with demand curve Cr2d; the lender grants quantity Cr2 to the rate r2 even if the applicant wants Cr3; the difference between Cr2 and Cr3 is credit rationing. The situation persists even if the applicant is willing to pay greater interest for the credit.

Figure 1. Credit Rationing as a Result of the Risk of Borrower Default
Source: Adopted from Stiglitz and Weiss (1981) and Jaffee and Stiglitz (1990).

Freimer and Gordon (1965) distinguish between “weak credit rationing” and “strict credit rationing.” The former, Hodgman’s rationing by interest rate, exists when the creditor offers growing resources in exchange for proportional interest rates. Strict rationing occurs when the creditor is willing to grant any amount of credit, up to a certain maximum limit, given a certain interest rate.

Jaffee and Modigliani (1969) define credit rationing as the circumstances in which demand exceeds supply at a given interest rate. These authors propose the concepts of “equilibrium rationing,” if rationing occurs when establishing the required rate at its long-term equilibrium rate, and “dynamic rationing,” which occurs in the short term when the active rate has not been adjusted to its optimal level. Baltensperger (1978) brings back this classification, but with the terms “permanent rationing” (equilibrium) and “temporary rationing” (not equilibrium), which assumes its origin is slow price adjustment.3

Mason (1977) writes that “pure rationing” occurs due to reasons associated with the price of credit. The final supply is determined at the level where the creditor’s yields are maximized.4 “Non-price rationing” is a temporary situation resulting from changes in the conditions (besides prices) for credit contracts. Keaton (1979) offers another classification: for “type I rationing,” although there are various applicants with similar credit ratings, resources are only granted to some of them. The rest are rationed even though they are willing to pay greater interest rates. For “type II rationing,” even if the applicants have similar credit quality, all are rationed because the supply of credit is limited (they receive fewer resources than the applicants).

3 It is useful to distinguish between price rigidity in the neoclassical sense and in the Keynesian school of thought. The former interprets rigidity as permanent (or invariable) price fixing at a determined level. The latter views rigidity as the gradual and inertial adjustment of prices.

4 This concept is similar to what Hodgman proposed (1960).

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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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