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The simple analytics of oligopoly banking in developing economies

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  • Khemraj, Tarron

Abstract

Previous studies have documented the tendency for the commercial banking sector of many developing economies to be highly liquid and be characterised by a persistently high interest rate spread. This paper embeds these stylised facts in an oligopoly model of the banking firm. The paper derives both the loan and deposit rates as a mark up rate over a relatively safe foreign interest rate. Then, using a diagrammatic framework, the paper provides an analysis of: (i) the distribution of financial surplus among savers, business borrowers and banks; (ii) exogenous deposit shocks; (iii) exogenous loan demand shocks; and (iv) the impact of interest rate control on financial intermediation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22266.

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Date of creation: Jan 2010
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Handle: RePEc:pra:mprapa:22266

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Keywords: Oligopoly; commercial banks; developing economies; distribution;

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References

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  1. Ephraim W. Chirwa & Montfort Mlachila, 2004. "Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 5.
  2. David Fielding & Anja Shortland, 2005. "Political Violence and Excess Liquidity in Egypt," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 542-557.
  3. David Neumark & Steven A. Sharpe, 1989. "Market structure and the nature of price rigidity: evidence from the market for consumer deposits," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 52, Board of Governors of the Federal Reserve System (U.S.).
  4. David Fielding & Anja Shortland, 2002. "Political Violence and Excess Liquidity in Egypt: A Note," Discussion Papers in Economics 02/5, Department of Economics, University of Leicester.
  5. Slovin, Myron B & Sushka, Marie Elizabeth, 1983. " A Model of the Commercial Loan Rate," Journal of Finance, American Finance Association, vol. 38(5), pages 1583-96, December.
  6. Gaston Gelos, 2006. "Banking Spreads in Latin America," IMF Working Papers 06/44, International Monetary Fund.
  7. Winston Moore & Roland Craigwell, 2002. "Market Power and Interest Rate Spreads in the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(4), pages 391-405.
  8. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers, United Nations, Department of Economics and Social Affairs 60, United Nations, Department of Economics and Social Affairs.
  9. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  10. C. A. E. Goodhart, 2009. "The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 76(s1), pages 821-830, October.
  11. Hannan, Timothy H, 1991. "Foundations of the Structure-Conduct-Performance Paradigm in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(1), pages 68-84, February.
  12. Magnus Saxegaard, 2006. "Excess Liquidity and the Effectiveness of Monetary Policy," IMF Working Papers 06/115, International Monetary Fund.
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Cited by:
  1. Khemraj, Tarron & Primus, Keyra, 2013. "Testing for the Credit Crunch in Trinidad and Tobago Using an Alternative Method," MPRA Paper 47372, University Library of Munich, Germany.

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