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Excess liquidity, oligopolistic loan markets and monetary policy in LDCs

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Author Info
Tarron Khemraj

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Abstract

Evidence 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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Paper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 64.

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Length: 17 pages
Date of creation: Feb 2008
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Handle: RePEc:une:wpaper:64

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Related research
Keywords: excess bank liquidity oligopoly 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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  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. Mark R. Stone, 2003. "Inflation Targeting Lite," IMF Working Papers 03/12, International Monetary Fund. [Downloadable!]
  3. 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!]
    Other versions:
  4. Ephraim W. Chirwa & Montfort Mlachila, 2004. "Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi," IMF Staff Papers, Palgrave Macmillan Journals, vol. 51(1), pages 5. [Downloadable!] (restricted)
  5. 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.
  6. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
  7. Fry, Maxwell J., 1982. "Models of financially repressed developing economies," World Development, Elsevier, vol. 10(9), pages 731-750, September. [Downloadable!] (restricted)
  8. 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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  9. 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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