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Testing for the Credit Crunch in Trinidad and Tobago Using an Alternative Method

Author

Listed:
  • Khemraj, Tarron
  • Primus, Keyra
Abstract
This paper examines whether the decline in loans to the private sector in Trinidad and Tobago from mid-2009 was caused by a demand-induced or the credit crunch phenomenon. The study presents an alternative methodology for estimating the credit crunch. The new methodology emphasizes an aggregate banking model in which excess liquidity and interest rate spread are important stylized facts. The analytical framework is used to identify shocks to loans and deposits that are found to be empirically related to excess liquidity. Using Two-Stage Least Squares (TSLS), we estimate auxiliary regressions of random deposit and loan shocks. The results suggest that weak loan demand instead of a supply-induced credit crunch best explains the decline.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:47372
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    References listed on IDEAS

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    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. Sylvanus Ikhide, 2003. "Was There a Credit Crunch in Namibia Between 1996-2000?," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 269-290, November.
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    More about this item

    Keywords

    Credit Crunch; Excess Liquidity; Loanable Funds Model;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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