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

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Listed:
  • Charles Abuka
  • Ronnie K Alinda
  • Ms. Camelia Minoiu
  • José-Luis Peydró
  • Mr. Andrea F Presbitero

Abstract

The transmission of monetary policy to credit aggregates and the real economy can be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. We empirically assess the bank lending channel in Uganda during 2010–2014 using a supervisory dataset of loan applications and granted loans. Our analysis focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,200 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 & Ms. Camelia Minoiu & José-Luis Peydró & Mr. Andrea F Presbitero, 2015. "Monetary Policy in a Developing Country: Loan Applications and Real Effects," IMF Working Papers 2015/270, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/270
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    Cited by:

    1. 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.
    2. 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.
    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. "Taking Stock - Credit Measures in Monetary Transmission," Jena Economics Research Papers 2016-002, Friedrich-Schiller-University Jena.
    5. 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).
    6. Stefan Behrendt, 2016. "Determinants of lending activity in the Euro area," Jena Economics Research Papers 2016-017, Friedrich-Schiller-University Jena.

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    More about this item

    Keywords

    WP; bank balance; Monetary policy transmission; Bank lending channel; Bank balance sheet channel; Developing countries; lending rate; demand shock; market power; bank capital; Loans; Bank credit; Credit; Financial statements; Liquidity; Sub-Saharan Africa; East Africa;
    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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