TESTING FOR CREDIT RATIONING - AN APPLICATION OF DISEQUILIBRIUM ECONOMETRICS

Testing for credit rationing ha; traditionally consisted of examining the response of loan rates to other market interest rates. A model dev eloped by Greenwald and Stiglitz (1990) allows for a direct test for p ersistent excess demand for credit. I estimate three models of the sho rt-term credit market: all firms experience equilibrium, all firms are rationed (have an excess demand for short-term credit), and a mixture of the two. A heuristic likelihood ratio test comparing the all equil ibrium likelihood to the mixed likelihood constitutes the test for cre dit rationing. Application of the test to firm-level data reveals that banks ration some firms in every sample examined.