INTEREST-RATES IN A CREDIT CONSTRAINED ECONOMY

When households face credit constraints in an economy with inside as w ell as outside money stationary equilibrium real interest rates are be low the household rate of time preference. They also depend significan tly upon household risk aversion, the demand for inside versus outside money, bank costs, bank reserves, inflation, and the marginal product ivity of capital and capital depreciation rates. In addition, changes in financial variables affect per capita capital and output to a great er extent when households are credit constrained.