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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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  1. 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.
  2. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
  3. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
  4. Magnus Saxegaard, 2006. "Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa," IMF Working Papers 06/115, International Monetary Fund.
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  6. 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.
  7. 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.
  8. Fry, M.J., 1996. "Emancipating the Banking System and Developing Markets for Government Debt," Papers 96-05, University of Birmingham - International Financial Group.
  9. Mark R. Stone, 2003. "Inflation Targeting Lite," IMF Working Papers 03/12, International Monetary Fund.
  10. 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.
  11. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
  12. 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.
  13. Tomás J. T. Baliño & Charles Enoch & William E. Alexander, 1995. "The Adoption of Indirect Instruments of Monetary Policy," IMF Occasional Papers 126, International Monetary Fund.
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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. 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.
  3. Anderson-Reid, Karen, 2011. "Excess reserves in Jamaican Commercial Banks: The implications for Monetary Policy," MPRA Paper 43663, University Library of Munich, Germany.
  4. Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany.
  5. 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.
  6. Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
  7. 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.

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