FEDERAL LENDING AND THE MARKET FOR CREDIT

Federal lending is an important, but unrecognized feature of modern credit markets. This paper analyzes the effects of credit interventions on credit allocation and economic efficiency. The underlying model posits asymmetric information between borrowers and lenders, and allows for market clearing, rationed, or redlined equilibria. Principal results include: unsubsidized credit interventions are neutral; the relative effectiveness of alternative lending instruments depends on whether rationing occurs; interactions among programs can have perverse effects; and, even without an informational advantage, the government may enact welfare-improving credit policies under certain conditions. © 1990.