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

Tarron Khemraj

Oxford Economic Papers, 2010, vol. 62, issue 1, 86-113

Abstract: Evidence about commercial banks' liquidity preference says the following about the loan market in less developed countries (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. In order to present its case, the paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is largely consistent with the observed stylized facts of flat liquidity preferences. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

Date: 2010
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