Credit market failures and policy

2009

In a simple model of the credit market, based on Stiglitz-Weiss (1981), equilibria are computed and optimal policies to correct market failures are characterized. Some widely applied policies, notably interest-rate subsidies and investment subsidies, are compared to theoretical optimum, and an alternative optimal policy is described which we argue is more robust to model misspecification. An insight on the trade-off between credit policy and infrastructural investment is also offered. A discussion of some aspects of regional policy in Italy's Mezzogiorno is finally presented as an application of the analysis.