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Monetary Policy in a Developing Country: Loan Applications and Real Effects

Author

Listed:
  • Charles Abuka

    (Bank of Uganda)

  • Ronnie K. Alinda

    (Bank of Uganda)

  • Camelia Minoiu

    (International Monetary Fund (IMF))

  • Jose-Luis Peydro

    (ICREA-Universitat Pompeu Fabra,CREI, Barcelona GSE and CEPR.)

  • Andrea Filippo Presbitero

    (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR)

Abstract

We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.

Suggested Citation

  • Charles Abuka & Ronnie K. Alinda & Camelia Minoiu & Jose-Luis Peydro & Andrea Filippo Presbitero, 2015. "Monetary Policy in a Developing Country: Loan Applications and Real Effects," Mo.Fi.R. Working Papers 114, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    • Handle: RePEc:anc:wmofir:114
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    Cited by:

    1. Stefan Behrendt, 2016. "Taking Stock - Credit Measures in Monetary Transmission," Jena Economics Research Papers 2016-002, Friedrich-Schiller-University Jena.
    2. Becker, Chris & Ossandon Busch, Matias & Tonzer, Lena, 2021. "Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil," Journal of Corporate Finance, Elsevier, vol. 71(C).
    3. Junankar, Pramod N. (Raja), 2019. "Monetary Policy, Growth and Employment in Developing Areas: A Review of the Literature," IZA Discussion Papers 12197, Institute of Labor Economics (IZA).
    4. Stefan Behrendt, 2016. "Determinants of lending activity in the Euro area," Jena Economics Research Papers 2016-017, Friedrich-Schiller-University Jena.
    5. Ms. Grace B Li & Mr. Stephen A. O'Connell & Mr. Christopher S Adam & Mr. Andrew Berg & Mr. Peter J Montiel, 2016. "VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries," IMF Working Papers 2016/090, International Monetary Fund.
    6. Sawuya Nakijoba, 2018. "Determinants of Nominal Effective Exchange Rate in Uganda (2000-2017): A Vecm Approach," Applied Economics and Finance, Redfame publishing, vol. 5(5), pages 45-58, September.

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    More about this item

    Keywords

    Bank balance sheet channel; Bank lending channel; Developing countries; Monetary policy transmission;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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