Credit market imperfections and long-run macroeconomic consequences

This paper develops a dynamic general-equilibrium model with production to examine the inter-relationships between the real and the financial sectors with and without credit market imperfections. Due to the moral hazard problem, borrowers may take the money and run while lenders may ration credit, resulting in a widened financial spread and low effective bank loans, compared to the unconstrained equilibrium. Credit rationing causes both the loan and the deposit rates to rise. In either unconstrained or constrained equilibrium, the long-run effects of a productivity improvement on real and financial activities depends crucially on where it is originated.