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Unformatted text preview: timate borrowers, is depicted by the curve XS in
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 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 in Figure 3A, one can use Figure 3A to determine the two interest rates.
Determinants of the Supply of Intermediation
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
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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