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What does excess bank liquidity say about the loan market in Less Developed Countries?

  • Tarron Khemraj
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    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.

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    Paper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 60.

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    Length: 16 pages
    Date of creation: Nov 2007
    Date of revision:
    Handle: RePEc:une:wpaper:60
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    1. David Fielding & Anja Shortland, 2005. "Political Violence and Excess Liquidity in Egypt," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 542-557.
    2. 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 5.
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    5. Prisman, Eliezer Z. & Slovin, Myron B. & Sushka, Marie E., 1986. "A general model of the banking firm under conditions of monopoly, uncertainty, and recourse," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 293-304, March.
    6. Winston Moore & Roland Craigwell, 2002. "Market Power and Interest Rate Spreads in the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(4), pages 391-405.
    7. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
    8. Singh, Ajit, 1997. "Financial Liberalisation, Stockmarkets and Economic Development," Economic Journal, Royal Economic Society, vol. 107(442), pages 771-82, May.
    9. 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.
    10. Sylvanus Ikhide, 2003. "Was There a Credit Crunch in Namibia Between 1996-2000?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 269-290, November.
    11. Simatele, Munacinga C H, 2004. "Financial sector reforms and monetary policy reforms in Zambia," MPRA Paper 21575, University Library of Munich, Germany.
    12. International Monetary Fund, 2005. "Quantitative Assessment of a Financial System—Barbados," IMF Working Papers 05/76, International Monetary Fund.
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