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This curve reflects the consequences of profit

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Unformatted text preview: timate borrowers, is depicted by the curve XS in Figure Figure 3B. This curve reflects the consequences of profit maximization by intermediaries, mediaries, where the intermediaries in question need not be understood to consist solely or even primarily of traditional commercial banks. Both the equilibrium credit spread spread and the equilibrium volume of credit are then determined by the intersection tion between the XS and XD schedules. And given an equilibrium credit spread ω, determined determined in Figure 3A, one can use Figure 3A to determine the two interest rates. Determinants of the Supply of Intermediation The The structural relationship represented by the supply of intermediation schedule XS in Figure 3B can be motivated in various ways. One model assumes that intermediaries have costs of originating and servicing loans, or of managing 30 Journal of Economic Perspectives Figure 3 Credit Market Equilibrium with Credit Supply Frictions A: Effect of a Credit Spread ω1 on the Equilibrium Interest Rates for Borrowers and Savers, and on the Equilibrium Volume of Credit LS Interest rate i ib ω1 e is LD L1 L Volume of lending B: Determination of the Equilibrium Credit Spread Interest rate spread (between savers and borrowers) ω XS ω1 XD L1 Volume of lending L Notes: i s is the interest rate paid to savers, at which intermediaries are able to fund themselves, and i b is the interest rate (the borrowing or loan rate) at which ultimate borr...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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