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

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Author Info
Tarron Khemraj

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Abstract

Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (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 a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.

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Paper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 60.

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Length: 16 pages
Date of creation: Nov 2007
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Handle: RePEc:une:wpaper:60

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Related research
Keywords: Excess bank liquidity; oligopoly banking; loan market; monetary policy;

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Find related papers by JEL classification:
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Fry, M.J., 1996. "Emancipating the Banking System and Developing Markets for Government Debt," Papers 96-05, University of Birmingham - International Financial Group.
  3. Mark R. Stone, 2003. "Inflation Targeting Lite," IMF Working Papers 03/12, International Monetary Fund. [Downloadable!]
  4. Ajit Singh, 1998. "Financial liberalisation, stockmarkets and economic development," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 8(1), pages 165-182.
    Other versions:
  5. Philip Arestis & Panicos Demetriades, 1999. "Financial Liberalization: The Experience of Developing Countries," Eastern Economic Journal, Eastern Economic Association, vol. 25(4), pages 441-457, Fall. [Downloadable!]
  6. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
  7. repec:pal:imfstp:v:51:y:2004:i:1:p:5 is not listed on IDEAS
  8. William E. Alexander & Charles Enoch & Tomás J. T. Baliño, 1995. "The Adoption of Indirect Instruments of Monetary Policy," IMF Occasional Papers 126, International Monetary Fund.
  9. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
  10. Magnus Saxegaard, 2006. "Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa," IMF Working Papers 06/115, International Monetary Fund. [Downloadable!]
  11. Fry, Maxwell J., 1982. "Models of financially repressed developing economies," World Development, Elsevier, vol. 10(9), pages 731-750, September. [Downloadable!] (restricted)
  12. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  13. Fry, M.J., 1996. "Emancipating the Banking System and Developing Markets for Government Debt," Discussion Papers 96-22, Department of Economics, University of Birmingham.
  14. David Fielding & Anja Shortland, 2005. "Political Violence and Excess Liquidity in Egypt," The Journal of Development Studies, Taylor and Francis Journals, vol. 41(4), pages 542-557, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany. [Downloadable!]
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