Collateral, Credit Rationing and the Real Effect of Monetary Policy

This paper tries to improve the identification of firms whose access to bank credit would be threatened by a tightening of monetary policy. It extends a simple competitive credit rationing model with limited collateral by introducing a central bank financing facility. The effects of monetary policy are then examined. Besides the standard interest rate effect, the study shows that a tighter monetary policy would reduce bank lending to entrepreneurs endowed with low-risk projects and limited net wealth. In addition, the economy would become more volatile.