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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 commercial banks' liquidity preference says the following about the loan market in less developed countries (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. In order to present its case, the paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is largely consistent with the observed stylized facts of flat liquidity preferences. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

Suggested Citation

  • Tarron Khemraj, 2010. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 86-113, January.
    • Handle: RePEc:oup:oxecpp:v:62:y:2010:i:1:p:86-113
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    Citations

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    Cited by:

    1. Eli Direye & Tarron Khemraj, 2022. "Central bank securities and foreign exchange market intervention in a developing economy," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 280-297, February.
    2. Ahmed, Abdullahi D., 2013. "Effects of financial liberalization on financial market development and economic performance of the SSA region: An empirical assessment," Economic Modelling, Elsevier, vol. 30(C), pages 261-273.
    3. Direye, Eli & Khemraj, Tarron, 2021. "Central bank securities and FX market intervention in a developing economy," MPRA Paper 111533, University Library of Munich, Germany, revised 09 Aug 2021.
    4. Ruiz-Porras, Antonio, 2011. "ALM practices, multiple uncertainty and monopolistic behavior: A microeconomic study of banking decisions," MPRA Paper 32873, University Library of Munich, Germany.
    5. Mr. Robert Blotevogel, 2013. "Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions: Lessons from Mauritania," IMF Working Papers 2013/077, International Monetary Fund.
    6. Poghosyan, Tigran, 2011. "Slowdown of credit flows in Jordan in the wake of the global financial crisis: Supply or demand driven?," Economic Systems, Elsevier, vol. 35(4), pages 562-573.
    7. Edgar A. Ghossoub, 2015. "Inflation Thresholds and the Efficiency of the Banking Sector," Working Papers 0159eco, College of Business, University of Texas at San Antonio.
    8. Stewart, Robert & Chowdhury, Murshed, 2021. "Banking sector distress and economic growth resilience: Asymmetric effects," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    9. Jordan, Alwyn & Branch, Sharon & McQuay, Andrea & Cooper, Yvonne & Smith, Latoya, 2012. "An analysis of bank liquidity in the Bahamas,2001-2012," MPRA Paper 51872, University Library of Munich, Germany.
    10. Tamini, Arnaud & Petey, Joël, 2021. "Hoarding of reserves in the banking industry: Explaining the African paradox," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 214-225.
    11. Ghossoub, Edgar A., 2023. "Economic growth, inflation, and banking sector competition," Economic Modelling, Elsevier, vol. 129(C).
    12. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.

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