Credit Rationing Theory Study

The interruptions in the supply of credit can have important macroeconomic implications. During the world depression in 1930s, the interruptions in the supply of credit played an important role. After that, a series of financial crises, such as the American 1987 stock market crash,the 1991 failure of the Bank of New England and the liquidity crunch of Russia in 1990s, made people gradually realized the importance of credit rationing and the credit availability for economic expansion. But the economists seldom pay attention to the bank and credit market. In Walrasian general equilibrium models and the world of Arrow-Debreu model, the bank is useless. According to the tenet of traditional economics, interest rate can adjust automatically the credit market to equilibrium on the premise of perfect information and zero transaction costs. If demand should exceed supply, interest rate will rise, decreasing demand and/or increasing supply until demand and supply are equated at the new equilibrium price. If there exists credit rationing, it is viewed as temporary disequilibrium phenomena caused by an exogenous shock to the economy or long-term credit rationing caused by governmental constraints. But a series of financial crises made it clear in credit market non-price terms of contract can also play an important role to the equilibrium of credit market as well as interest rate. Information economics rising in the 1960s also stroke the hypothesis of perfect information. Some New- Keynesian developed the hypothesis of Keynesian non-clearing market that leaded to the theory of credit rationing on the premise of asymmetric information. The theory of credit rationing rejects the viewpoint of traditional economics about the credit market equilibrium, and affirms the importance of bank for economic expansion. It shows that in equilibrium a loan market may characterized by credit rationing and the functions of bank are not limited in the form of supply of money and the change of the lenders' behavior may affect the credit availability which could have great influence on macro-economy. The greater realism afforded by the theory of credit rationing has been a welcome. The theory of credit rationing is useful not only for the developed countries but also for the developing countries without mature financial markets. Especially, for such a country of China that is experiencing transition, the theory of credit rationing may be very useful. So studying the theory of credit rationing synthetically is necessary and that's the purpose of this article. The main contents of this article are showed as followed. Firstly, it's a brief preface. In the preface, the theory of credit rationing is elicited through the discussion of credit rationing phenomenon and the traditional analysis of economics to it. After that, the preface shows the main contents and the theoretical and practical significance of this theory. Chapter 1 presents a broad overview of the theory of credit rationing. The definition of credit rationing is disordered. So I definite credit rationing in the first place and then distinguish some important concepts such as disequilibrium credit rationing and equilibrium credit rationing. Then I explore the origin of the theory as well as its development and indicate a fore-and-aft overview of this theory. Chapter 2 concentrates on the explanations of the credit rationing phenomenon. This chapter mainly discusses how adverse selection,moral hazard and monitoring costs lead lenders to ration credit with the premise of asymmetric information. This chapter also introduces the recent development of this theory, such as asymmetric expectations,APR and enforcement of loan contract. Chapter 3 explores some significant issues about credit rationing, including collateral,customer relationship and microfinance. Collateralrequirements are often used by the lender as a mean to ration credit. Collateral requirements are useful but not necessary, and this can be easily seen from the case of microfinance. However, customer relationship is imp...