A New Look at the Effects of the Interest Rate Ceiling in Arkansas

42 Pages Posted: 10 Aug 2021

See all articles by Gregory Elliehausen

Gregory Elliehausen

Board of Governors of the Federal Reserve System

Simona Hannon

Board of Governors of the Federal Reserve System

Thomas W. Miller, Jr.

Mississippi State University

Date Written: July 1, 2021

Abstract

Arkansas has been a popular place to study the effects of rate ceilings because of its exceptionally low interest rate ceiling. This paper examines the effects of the Arkansas rate ceiling on credit use by risky nonprime Arkansas consumers, which are especially vulnerable to credit rationing because of the low ceiling. We compare the level and composition of consumer debt of nonprime consumers in Arkansas with that of prime Arkansas consumers and also nonprime consumers in the neighboring states. We find that nonprime Arkansas consumers are less likely to have consumer debt and, conditional on having debt, have lower, but not much lower, levels of consumer debt than prime Arkansas consumers and nonprime consumers in neighboring states. Types of credit used by nonprime Arkansas consumers tend to differ from those of our comparison groups. Notable is much lower use of consumer finance loans, traditionally an important source of credit for higher risk consumers. This finding suggests rate-based rationing of risky consumers. Also notable is lower use of bank credit despite federal preemption of the rate ceiling for banks. This result is consistent with banks’ traditional avoidance of risky lending.

JEL Classification: D14, G20

Suggested Citation

Elliehausen, Gregory and Hannon, Simona and Miller, Jr., Thomas W., A New Look at the Effects of the Interest Rate Ceiling in Arkansas (July 1, 2021). FEDS Working Paper No. 2021-45, Available at SSRN: https://ssrn.com/abstract=3902306 or http://dx.doi.org/10.17016/FEDS.2021.045

Gregory Elliehausen (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2326 (Phone)

Simona Hannon

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Thomas W. Miller, Jr.

Mississippi State University ( email )

Mississippi State, MS 39762
United States

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