Promoting market discipline through interest rates: does financial liberalization matter?

Saibal Ghosh

Applied Economics Letters, 2007, vol. 14, issue 2, pages 135-143

Abstract: This article explores whether financial liberalization promotes market discipline in Indian banking in the form of lower deposit interest rates. Using annual data on banks from 1993 to 2004, the findings reveal that, after controlling for a myriad of factors, financial liberalization is influential in promoting market discipline by lowering deposit rates, particularly for state-owned and old private bank groups. More importantly, under financial liberalization, banks that are well-capitalized and have low levels of sticky loans pay lower deposit rates. The policy implication of the analysis is that promoting greater financial liberalization can have important ramifications in promoting market discipline.

Date: 2007

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