Credit-Supply Factors and Malawian Business Cycles

Thomson Kumwenda, Ronald Mangani, Jacob Mazalale and Exley Silumbu

No 77, Dynare Working Papers from CEPREMAP

Abstract: This study investigates the role of credit-supply factors in Malawian business cycles. A developing country banking sector is embedded into a Bayesian DGSE model using data for Malawi for the period 2004 to 2020. Financial intermediation in the model includes the issuance of loans to both households and firms, deposit mobilization, and actively financing of public debt to a cash-constrained central government treasury. Our study finds that banking sector shocks emanating from financing public debt plays a significant role in explaining variations in output in Malawi, both in the short and long run. Our study also finds that shocks from banking sector profits, intermediation role to household loans, entrepreneurs and firms do not have adverse effects on the fluctuation of output in Malawi which is contrary to the public sentiments. We also established that these shocks crowd-out private sector credit supply, and hence push interest rates up in the face of a liquidity-constrained treasury. These crowding outcomes are in the form of a trade-off of investment opportunities for banks. For every excess fund above the regulatory liquidity threshold, banks are more likely induced to invest only 20.96% in loans to households and 19.56% in loans to firms.

Keywords: Public Debt; Collaterals; Banks; Interest Rates; Crowding-Out (search for similar items in EconPapers)
JEL-codes: E30 E32 E43 E51 E52 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-dge and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:cpm:dynare:077

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