A Model of Credit Rationing without Asymmetric Information: An Inquiry into the Credit Market during an Economic Depression

In this paper, we analyze the credit market and the effect of the monetary policy during an economic depression. The aim of this paper is to derive the credit rationing that would take place in the case of economic depression. Firms with given equities always face the risk of bankruptcy, and a commercial bank provides loans to these firms while taking into account their default risk. During an economic depression, each firm's equity is small, and commercial bank is pessimistic. The remarkable feature of our model is that the estimation of rationing can be arrived at in spite of the exclusion of the asymmetric information assumption. In our model, the role of the expectation of the commercial bank is significant. The rationing result comes from the different formalization of the commercial bank from mainstream theories. Because anyone will accept the debt the commercial bank issues, there is no need for it to have any deposits before it makes loans. In contrast to the mainstream theories, the commercial bank does not face a physical constraint, i.e. the deposits it holds. Deposits are generated by lending. This is the special feature of the commercial bank. Although the Central Bank is introduced, and it implements the monetary policy by manipulating the base rate to steer the economy, it is not always effective, even though the economy is not in a liquidity trap. In this manner, the monetary policy may not be a panacea.