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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.

Suggested Citation

  • Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
  • Handle: RePEc:une:wpaper:60
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    File URL: http://www.un.org/esa/desa/papers/2007/wp60_2007.pdf
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    References listed on IDEAS

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    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 1-5.
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    Citations

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    Cited by:

    1. 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.
    2. Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
    3. 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.
    4. Tarron Khemraj, 2009. "Excess liquidity and the foreign currency constraint: the case of monetary management in Guyana," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 2073-2084.
    5. Deraniyagala, Sonali & Kaluwa, Ben, 2011. "Macroeconomic policy for employment creation: The case of Malawi," MPRA Paper 52715, University Library of Munich, Germany.
    6. Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany.
    7. Willmott, Bryony, 2014. "Excess reserves, interbank markets and domestic money market intervention," MPRA Paper 57046, University Library of Munich, Germany.
    8. Khemraj, Tarron & Primus, Keyra, 2013. "Testing for the Credit Crunch in Trinidad and Tobago Using an Alternative Method," MPRA Paper 47372, University Library of Munich, Germany.
    9. Sarah Sanya & Matthew Gaertner, 2012. "Assessing Bank Competition within the East African Community," IMF Working Papers 12/32, International Monetary Fund.
    10. Guy, Kester & Lowe, Shane, 2012. "Tracing the Liquidity Effects on Bank Stability in Barbados," MPRA Paper 52205, University Library of Munich, Germany.
    11. 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.
    12. Anderson-Reid, Karen, 2011. "Excess reserves in Jamaican Commercial Banks: The implications for Monetary Policy," MPRA Paper 43663, University Library of Munich, Germany.

    More about this item

    Keywords

    Excess bank liquidity; oligopoly banking; loan market; monetary policy;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O16 - Economic Development, Innovation, 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

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