Essays on interest rates, growth and business cycles

Market imperfections, policies and institutions that constrain the well-functioning of credit markets have profound and long-lasting impact on economic performance. This dissertation provides further and new insights on this topic based on models tailored to developing countries and on evidence from Brazil.; Chapter 1 analyzes the macroeconomic implications of a Brazilian credit program that forces banks to lend a significant portion of their funds to selected high-risk, high-cost borrowers at below-market interest rates. Such a program imposes large losses to the banks which are offset through disproportionately higher interest rate spreads to non-selected borrowers. The positive and normative implications of the program are analyzed through the lens of a general equilibrium model tailored to the Brazilian economy. The model predicts that the program doubles the spreads to non-selected borrowers and greatly reduces the supply of credit and income per capita in the long-run.; Chapter 2 examines, theoretically and quantitatively, the effects of creditor rights and costly bankruptcy resolution on credit markets, interest rates and economic growth. The chapter presents an overlapping-generations model of capital accumulation which explicitly incorporates the degree of creditor protection and bankruptcy costs into loan contracts. The model predicts that, for a wide range of parameter values, both lower bankruptcy costs and higher creditor protection foster economic growth and reduces the cost of credit. The model's main normative lesson is that countries reforming their bankruptcy laws should not only increase the speed and reduce the cost of bankruptcy resolution but also improve creditor rights.; Finally, Chapter 3 shows that fluctuations in credit risk premium greatly increases macroeconomic volatility in developing countries. Specifically, the chapter analyzes the relationship between country risk premium and business cycles in a small open Brazilian economy. The chapter presents a dynamic general equilibrium model in which borrowing firms face working capital constraints, and in which the labor supply is independent of consumption. When the model is calibrated to the Brazilian economy it predicts that shocks to country risk can explain almost half of output fluctuations and can deliver business cycle regularities consistent with the stylized facts for the Brazilian economy.