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Banking, Costly Credit, and Interest Rates with Limited Commitment

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  • Hyung Sun Choi

    (Kyung Hee University)

Abstract

A model for banking is constructed to explore the role of a payment system with limited commitment as another determinant of a spread between the loan and deposit rates. Limited commitment constrains credit settlements. In equilibrium, collateral is required in the payment system and affects the loan rate, the distribution of money, consumption, and output. The optimal policy mix minimizes the interest rate spread and increases output. The Friedman rule is generally not optimal.

Suggested Citation

  • Hyung Sun Choi, 2025. "Banking, Costly Credit, and Interest Rates with Limited Commitment," Korean Economic Review, Korean Economic Association, vol. 41, pages 111-140.
    • Handle: RePEc:kea:keappr:ker-20250101-41-1-04
    as

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    References listed on IDEAS

    as
    1. Tomura, Hajime, 2018. "Payment instruments and collateral in the interbank payment system," Journal of Economic Theory, Elsevier, vol. 178(C), pages 82-104.
    2. Valerie R. Bencivenga & Gabriele Camera, 2011. "Banking in a Matching Model of Money and Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 449-476, October.
    3. Paola Boel & Gabriele Camera, 2020. "Monetary Equilibrium and the Cost of Banking Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 653-683, June.
    4. repec:dau:papers:123456789/7353 is not listed on IDEAS
    5. Charles M. Kahn & William Roberds, 2009. "Payments Settlement: Tiering in Private and Public Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 855-884, August.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    7. Francisco J. Callado Munoz, 2007. "The Use of Collateral in Gross and Net Payment Systems," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 459-481.
    8. Mariana Rojas Breu, 2013. "The Welfare Effect Of Access To Credit," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 235-247, January.
    9. Williamson, Stephen D., 2003. "Payments systems and monetary policy," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 475-495, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banking; Costly Credit; Payment System; Interest Rates; Limited Commitment;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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