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

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  • Tarron Khemraj

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:une:wpaper:60

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

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References

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  1. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
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Cited by:
  1. Sarah Sanya & Matthew Gaertner, 2012. "Assessing Bank Competition within the East African Community," IMF Working Papers 12/32, International Monetary Fund.
  2. Jayaraman, T.K. & Choong, Chee-Keong, 2012. "Implications of Excess Liquidity in Fiji’s Banking System: An Empirical Study," MPRA Paper 43505, University Library of Munich, Germany.
  3. Khemraj, Tarron, 2011. "The Non-Zero Lower Bound Lending Rate and the Liquidity Trap," MPRA Paper 42030, University Library of Munich, Germany, revised 01 May 2012.
  4. 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.
  5. Guy, Kester & Lowe, Shane, 2012. "Tracing the Liquidity Effects on Bank Stability in Barbados," MPRA Paper 52205, University Library of Munich, Germany.
  6. Tarron Khemraj, 2009. "Excess liquidity and the foreign currency constraint: the case of monetary management in Guyana," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 2073-2084.
  7. Deraniyagala, Sonali & Kaluwa, Ben, 2011. "Macroeconomic policy for employment creation: The case of Malawi," MPRA Paper 52715, University Library of Munich, Germany.
  8. Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
  9. Abel E. Ezeoha, 2011. "Banking consolidation, credit crisis and asset quality in a fragile banking system: Some evidence from Nigerian data," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(1), pages 33-44, February.
  10. Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany.
  11. Anderson-Reid, Karen, 2011. "Excess reserves in Jamaican Commercial Banks: The implications for Monetary Policy," MPRA Paper 43663, University Library of Munich, Germany.

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