Rajan-Raghuram Model

The Rajan-Raghuram model explains how banks influence the economy's investment and growth through their credit policies. It suggests that banks' willingness to lend is affected by the overall financial environment and their own incentives. When banks are cautious, they lend less, slowing economic growth; when they are confident, they lend more, boosting investment and expansion. The model highlights the importance of financial stability and regulation, showing how banking behavior can significantly impact economic activity and growth over time.