Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia

Barry Scholnick

No 1991/084, IMF Working Papers from International Monetary Fund

Abstract: This study examines whether lending rates cleared the market for loans in Malaysia after interest rate liberalization. It is based on a theoretical model in which adverse selection and marginal cost pricing are brought together by the use of a quadratic loss function in the error correction format. This allows for the use of the cointegration methodology. Long-run tests support the model proposed in the paper, while rejecting part of the financial liberalization model. From the short-run results it is concluded that there is a large lag before lending rates respond to exogenous shocks, thus confirming that they do not fully clear the market for loans.

Keywords: WP; adverse selection; IB rate; commercial bank; interest rate; IL rate; control variable IL; S&W model; equation IL; ID rate; expected return; credit rationing; Multiple currency practices; Deposit rates; Commercial banks; Credit; Interbank rates; South America (search for similar items in EconPapers)
Pages: 43
Date: 1991-09-01
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