Preliminary-study of credit rationing in Ireland

Abstract

In their seminal study of credit rationing, Jaffee and Modigliani (1969) hypothesised that an intensification of the extent of credit rationing will manifest itself in a movement in banks' loan portfolios toward prime borrowers. In this paper, the hypothesis is tested in the context of Irish data. The Jaffee-Modigliani approach received moderate support for the larger of two groups of banks for which it was tested. In a small open economy such as Ireland's, with a fixed exchange rate and facing high capital mobility, interest rates are effectively exogenously determined and thus credit rationing may be the most important channel in transmitting monetary policy actions to the real economy.