This paper investigates the cause of rigid interest rate on consumer financial service market in Japan. Previous studies point out the existence of regulation, but they seem to be inconclusive about rigid “prime interest rate”. It is remarkable that this prime interest rate should be rigid same as another interest rate, because former can not be explained by the binding of regulation unlike latter.
The present paper argues that it would not be binding caused by regulation but “2 step interest rate regulation” which makes prime interest rate so rigid. In Japanese consumer financial service market, there are two different types of regulation. In other words, there are two types of binding in one market. Such a confusing condition makes profit of render so unstable, so render sets the interest rate at the same level regardless of other factors. Stiglitz and Weiss (1981) argued that the existence of default risk makes supply curve backward and interest rate rigid. We, however, see that these phenomena are caused by 2step interest regulation regardless of default risk.
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