Excess liquidity, oligopolistic loan markets and monetary policy in LDCs

Tarron Khemraj

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

Abstract: Evidence about commercial banks’ liquidity preference says the following about the loan market in LDCs: (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 an exogenous foreign interest rate, marginal transaction costs and a risk premium. The paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise tends to replicate the observed stylized facts.

Keywords: excess bank liquidity; oligopoly loan market; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 G21 L13 O10 O16 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-com, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:une:wpaper:64

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