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Excess liquidity, oligopolistic loan markets and monetary policy in LDCs

  • Tarron Khemraj
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    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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    File URL: http://www.un.org/esa/desa/papers/2008/wp64_2008.pdf
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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
    Date of revision:
    Handle: RePEc:une:wpaper:64
    Contact details of provider: Web page: http://www.un.org/en/development/desa/working-papers.html
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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.
    2. Fry, Maxwell J., 1982. "Models of financially repressed developing economies," World Development, Elsevier, vol. 10(9), pages 731-750, September.
    3. 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.
    4. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
    5. Singh, Ajit, 1996. "Financial liberalisation,stockmarkets and economic development," MPRA Paper 53897, University Library of Munich, Germany.
    6. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
    7. 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.
    8. Tomás J. T. Baliño & Charles Enoch & William E. Alexander, 1995. "The Adoption of Indirect Instruments of Monetary Policy," IMF Occasional Papers 126, International Monetary Fund.
    9. 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.
    10. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
    11. Mark R. Stone, 2003. "Inflation Targeting Lite," IMF Working Papers 03/12, International Monetary Fund.
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