The adverse effect of credit rationing on the efficiency of fund allocations has so far been neglected in the empirical literature on credit rationing. Disequilibrium econometrics cannot be relied on to estimate the magnitude of credit rationing in an economy like Taiwan’s where the bank-loan market is always in short supply of loanable funds.
The primary purpose of the present study is to measure the efficiency of fund allocations and the magnitude of credit rationing in Taiwan. Rather than use a disequilibrium econometric model, this study proposes a dual financial system model that incorporates the efficiency of fund allocations under credit rationing. Next, annual data covering the years 1965–1981 are used to estimate the degree of efficiency of fund allocations, the functions for the demand and supply of loans, and the magnitude of credit rationing.
The results of the study illustrate that credit rationing in Taiwan is neutral in respect to the efficiency of fund allocations, in the sense that bank loans are granted with equal accessibility to both high-efficient and low-efficient loan demands. The proportion of the excess demand of private enterprises for bank loans is estimated to be as high as 37 percent.
