Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico Executive Summary

The initial promise of microcredit, including such accolades as the 2006 Nobel Peace Prize, has given way to intense debate about if and when it is an effective development tool. Interest rates are central to this debate. Policymakers and donors promoting financial development have variously encouraged microfinance institutions (MFIs) to cut rates to expand access (under the assumption of elastic demand), or to raise rates to decrease reliance on subsidies and attract more investment capital (under the assumption of inelastic demand). In light of this, the price elasticity 1 of demand for credit—the extent to which demand for credit changes in response to interest rate shifts—is of key interest to policymakers and practitioners.