Excess liquidity, oligopolistic loan markets and monetary policy in LDCs
AbstractEvidence about commercial banks’ liquidity preference says the following about the loan market in LDCs: (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 an exogenous foreign interest rate, marginal transaction costs and a risk premium. The paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise tends to replicate the observed stylized facts.
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Bibliographic InfoPaper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 64.
Length: 17 pages
Date of creation: Feb 2008
Date of revision:
excess bank liquidity; oligopoly loan market; monetary policy;
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; Corporate Finance and Governance
- 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; Micro Finance Institutions; Mortgages
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
- NEP-CBA-2008-02-16 (Central Banking)
- NEP-COM-2008-02-16 (Industrial Competition)
- NEP-MAC-2008-02-16 (Macroeconomics)
- NEP-MON-2008-02-16 (Monetary Economics)
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