Credit market imperfections and economic development: Theory and evidence

Abstract

A model of credit markets in which there is a costly-state-verification problem is integrated into a neoclassical growth model. The presence of a credit market friction gives rise to credit rationing, which in turn impacts on the growth path of an economy. The model delivers predictions about the co-movements between per capita income, credit rationing, interest rates, and factor prices. The implications of the model are generally empirically supported in U.S. and Taiwanese data. The model also makes predictions about the consequences of government regulation of credit markets which are supported by the Taiwanese data.