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The simple analytics of oligopoly banking in developing economies

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  • Khemraj, Tarron

Abstract

Previous studies have documented the tendency for the commercial banking sector of many developing economies to be highly liquid and be characterised by a persistently high interest rate spread. This paper embeds these stylised facts in an oligopoly model of the banking firm. The paper derives both the loan and deposit rates as a mark up rate over a relatively safe foreign interest rate. Then, using a diagrammatic framework, the paper provides an analysis of: (i) the distribution of financial surplus among savers, business borrowers and banks; (ii) exogenous deposit shocks; (iii) exogenous loan demand shocks; and (iv) the impact of interest rate control on financial intermediation.

Suggested Citation

  • Khemraj, Tarron, 2010. "The simple analytics of oligopoly banking in developing economies," MPRA Paper 22266, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22266
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    References listed on IDEAS

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    7. R. Gaston Gelos, 2009. "Banking Spreads In Latin America," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 796-814, October.
    8. 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.
    9. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
    10. Mr. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa," IMF Working Papers 2006/115, International Monetary Fund.
    11. Slovin, Myron B & Sushka, Marie Elizabeth, 1983. "A Model of the Commercial Loan Rate," Journal of Finance, American Finance Association, vol. 38(5), pages 1583-1596, December.
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    Cited by:

    1. Khemraj, Tarron & Primus, Keyra, 2013. "Testing for the Credit Crunch in Trinidad and Tobago Using an Alternative Method," MPRA Paper 47372, University Library of Munich, Germany.
    2. Karpetis Christos & Papadamou Stefanos & Varelas Erotokritos, 2017. "The Role of the Number of Banks on Debt Dynamics: Evidence from Eurozone Countries," Review of Economics, De Gruyter, vol. 68(1), pages 41-62, April.

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    More about this item

    Keywords

    Oligopoly; commercial banks; developing economies; distribution;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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