The Role of Credit Markets in a Transition Economy with Incomplete Public Information

26 Pages Posted: 15 Feb 2006

See all articles by Kenneth M. Kletzer

Kenneth M. Kletzer

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Jorge E. Roldos

International Monetary Fund (IMF)

Date Written: February 1996

Abstract

In this paper we explore some of the informational problems that constrain the development of credit markets in transition economies. We characterize investment patterns under uncertainty and high costs of entry, when agents learn about the ultimate value of enterprises through production in a Bayesian way. Inefficiencies due to the lack of public information reduce the average return to capital. Under asymmetric information, credit would go to activities that can provide enough co-finance. Credit markets may fail to develop for a while if there is not enough individual wealth to complement credit. Once they operate, credit markets may magnify distortions in equity markets, such as those due to spontaneous privatization. An argument for the sequencing of capital market liberalization is provided.

JEL Classification: G10, G21

Suggested Citation

Kletzer, Kenneth M. and Roldos, Jorge E., The Role of Credit Markets in a Transition Economy with Incomplete Public Information (February 1996). IMF Working Paper No. 96/18, Available at SSRN: https://ssrn.com/abstract=882918

Kenneth M. Kletzer (Contact Author)

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
(408) 459-3407 (Phone)
(408) 459-5000 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Jorge E. Roldos

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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