What does excess bank liquidity say about the loan market in Less Developed Countries?

Tarron Khemraj

Working Papers from United Nations, Department of Economics and Social Affairs

Abstract: Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.

Keywords: Excess bank liquidity; oligopoly banking; loan market; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 G21 L13 O10 O16 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2007-11
New Economics Papers: this item is included in nep-ban, nep-dev and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:une:wpaper:60

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