Interest Rate Determination in Lebanon

Tushar Poddar, Mangal Goswami, Juan Sole and Victor Echévarria Icaza

No 2006/094, IMF Working Papers from International Monetary Fund

Abstract: This paper seeks to understand how interest rates are formed in Lebanon, by focusing on the pass-through from benchmark rates, prevailing liquidity conditions, and the main characteristics of the Lebanese economy, notably its open capital account, fixed exchange rate, high government borrowing requirement, large public debt, and high degree of deposit dollarization. We find that international interest rates are an important element in the determination of interest rates in Lebanon. In particular, the pass-through of global benchmark rates to interest rates on sovereign bonds is about 70 percent. The less-than-complete pass-through could be attributed to a home-bias effect reflecting a relatively stable and dedicated investor base. The study also shows that interest rates in Lebanon are affected by liquidity conditions as well as perceived sovereign risk.

Keywords: WP; interest rate; asset; yield; rate of return; interest rates; Lebanon; sovereign risk; FCD rate; Lebanese pound; Eurobond rate; interest rate arbitrage; T-bill rate; benchmark rate; Deposit rates; International reserves; Exchange rate risk; Interbank rates; Monetary base; Global (search for similar items in EconPapers)
Pages: 22
Date: 2006-04-01
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Citations: View citations in EconPapers (2)

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