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Interest Rate Determination in Lebanon

Author

Listed:
  • Mr. Tushar Poddar
  • Mr. Mangal Goswami
  • Mr. Juan Sole
  • Victor Echévarria Icaza

Abstract

This paper seeks to understand how interest rates are formed in Lebanon, by focusing on the pass-through from benchmark rates, prevailing liquidity conditions, and the main characteristics of the Lebanese economy, notably its open capital account, fixed exchange rate, high government borrowing requirement, large public debt, and high degree of deposit dollarization. We find that international interest rates are an important element in the determination of interest rates in Lebanon. In particular, the pass-through of global benchmark rates to interest rates on sovereign bonds is about 70 percent. The less-than-complete pass-through could be attributed to a home-bias effect reflecting a relatively stable and dedicated investor base. The study also shows that interest rates in Lebanon are affected by liquidity conditions as well as perceived sovereign risk.

Suggested Citation

  • Mr. Tushar Poddar & Mr. Mangal Goswami & Mr. Juan Sole & Victor Echévarria Icaza, 2006. "Interest Rate Determination in Lebanon," IMF Working Papers 2006/094, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/094
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    References listed on IDEAS

    as
    1. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
    2. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework (Détermination du taux d'intérêt dans les pays en développement: cadre théorique) (Determinación de los tipos de inter," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 377-403, September.
    3. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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    Cited by:

    1. Mr. E. H. Gardner & Mr. Julian Di Giovanni, 2008. "A Simple Stochastic Approach to Debt Sustainability Applied to Lebanon," IMF Working Papers 2008/097, International Monetary Fund.
    2. Bitar, Joseph, 2021. "The unique dollarization case of Lebanon," Economic Systems, Elsevier, vol. 45(2).

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