Why is the rational expectations equilibrium locally indeterminate if the central bank raises the nominal interest rate too actively in response to a rise in expected inflation? This is because although the bank succeeds in stabilizing the expectations of the future economy, it allows the...

By applying factor analysis to unique data on loan screening for small and medium-sized enterprises (SMEs) in Japan, we investigate the factors that banks actually evaluate when underwriting commercial loans. We find that banks emphasize three factors when they decide whether to grant loans: the...