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Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia

Author

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  • Barry Scholnick

Abstract

This study examines whether lending rates cleared the market for loans in Malaysia after interest rate liberalization. It is based on a theoretical model in which adverse selection and marginal cost pricing are brought together by the use of a quadratic loss function in the error correction format. This allows for the use of the cointegration methodology. Long-run tests support the model proposed in the paper, while rejecting part of the financial liberalization model. From the short-run results it is concluded that there is a large lag before lending rates respond to exogenous shocks, thus confirming that they do not fully clear the market for loans.

Suggested Citation

  • Barry Scholnick, 1991. "Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia," IMF Working Papers 1991/084, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1991/084
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