SIGNIFICANCE OF CREDIT

Smooth functioning of the financial system enhances efficiency of the economy by transferring funds from savers to borrowers. Financial markets differ from those for more conventional goods due to the asymmetry of information, which might result in credit rationing by non-price means. Credit rationing may also occur due to rigidities in interest rates. This thesis presents an overview of economic literature on credit rationing and attempts to localize this phenomenon for the case of transition countries. The overview of the Ukrainian credit market suggests that while the development of the structure of the market is largely over there remain institutional inefficiencies that lead to ‘infrastructure ’ credit rationing, preventing satisfaction of demand for credit. Several indirect tests for the significance of credit rationing are undertaken on macro and micro levels for the case of Ukraine. A test suggested by Galbraith (1996) is implemented using Ukrainian data. It is found that monetary policy has a greater capacity to expand output rather than contract it. That i