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Promoting market discipline through interest rates: does financial liberalization matter?

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  • Saibal Ghosh

Abstract

This article explores whether financial liberalization promotes market discipline in Indian banking in the form of lower deposit interest rates. Using annual data on banks from 1993 to 2004, the findings reveal that, after controlling for a myriad of factors, financial liberalization is influential in promoting market discipline by lowering deposit rates, particularly for state-owned and old private bank groups. More importantly, under financial liberalization, banks that are well-capitalized and have low levels of sticky loans pay lower deposit rates. The policy implication of the analysis is that promoting greater financial liberalization can have important ramifications in promoting market discipline.

Suggested Citation

  • Saibal Ghosh, 2007. "Promoting market discipline through interest rates: does financial liberalization matter?," Applied Economics Letters, Taylor & Francis Journals, vol. 14(2), pages 135-143.
    • Handle: RePEc:taf:apeclt:v:14:y:2007:i:2:p:135-143
    DOI: 10.1080/13504850500425824
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    References listed on IDEAS

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    1. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
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    6. Bhide, M G & Prasad, A & Ghosh, Saibal, 2001. "Emerging Challenges in Indian Banking," MPRA Paper 1711, University Library of Munich, Germany.
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    10. Mr. Roberto Steiner & Mr. Adolfo Barajas, 2000. "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers 2000/214, International Monetary Fund.
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    Cited by:

    1. Gutiérrez López, Cristina & Abad González, Julio, 2014. "¿Permitían los estados financieros predecir los resultados de los tests de estrés de la banca española? Una aplicación del modelo logit," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 17(1), pages 58-70.
    2. Yan Shen & Wenlong Bian, 2017. "Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector," Asian Economic Papers, MIT Press, vol. 16(3), pages 287-307, Fall.
    3. Saibal Ghosh, 2009. "Bank risk, charter value and depositor discipline: a simultaneous equations approach," Applied Economics Letters, Taylor & Francis Journals, vol. 16(6), pages 639-644.

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