A theory of linkage between monetary policy and banking failure in developing countries

Raulin Lincifort Cadet ()
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Raulin Lincifort Cadet: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: The purpose of this paper is to present a model that studies the impact of a tightening monetary policy on banking failure in a developing country. The interest rate on treasury bills is included in the model to measure monetary policy. Since the model considers developing countries with low-income level, the paper assumes that a secondary market does not exist. The model shows that, despite treasury bills constituting an alternative source of profit for banks in developing countries, a tightening monetary policy increases the probability of banking failure. In addition, the model shows that efficiency level explains the asymmetric effect of monetary policy on the profit of the banks. The policy implication of the results of the paper is that the central bank should take into account the adverse effect of a tightening monetary policy on banking failure, when planning policy decisions.

Keywords: banking; business failures; developing countries; interest rates; monetary policy (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

Published in Journal of Financial Economic Policy, 2009, 1 (2), pp.143 - 154. ⟨10.1108/17576380911010254⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00438122

DOI: 10.1108/17576380911010254

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