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Excess liquidity, oligopolistic loan markets and monetary policy in LDCs

Author

Listed:
  • Tarron Khemraj
Abstract
Evidence about commercial banks’ liquidity preference says the following about the loan market in LDCs: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over an exogenous foreign interest rate, marginal transaction costs and a risk premium. The paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise tends to replicate the observed stylized facts.

Suggested Citation

  • Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
    • Handle: RePEc:une:wpaper:64
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Khemraj, Tarron & Pasha, Sukrishnalall, 2008. "Foreign exchange market bid-ask spread and market power in an underdeveloped economy," MPRA Paper 11422, University Library of Munich, Germany.
    2. Khemraj, Tarron & Pasha, Sukrishnalall, 2012. "Analysis of an unannounced foreign exchange regime change," Economic Systems, Elsevier, vol. 36(1), pages 145-157.
    3. Jayaraman, T.K. & Choong, Chee-Keong, 2012. "Implications of Excess Liquidity in Fiji’s Banking System: An Empirical Study," MPRA Paper 43505, University Library of Munich, Germany.
    4. Guy, Kester & Lowe, Shane, 2012. "Tracing the Liquidity Effects on Bank Stability in Barbados," MPRA Paper 52205, University Library of Munich, Germany.
    5. Khemraj, Tarron & Hinova, Diana, 2011. "Elected Oligarchy and Economic Underdevelopment: The Case of Guyana," MPRA Paper 29733, University Library of Munich, Germany.
    6. Khemraj, Tarron & Langrin, R. Brian, 2009. "Dynamic interactions of bank assets in two foreign currency constrained economies," MPRA Paper 36620, University Library of Munich, Germany, revised Nov 2010.
    7. Marcel Takoulac Kamta & Desire Avom & Luc Nembot Ndeffo & Eric Mouchili Moumie, 2020. "Effect of Banking Concentration on Monetary Policy Transmission Mechanism in Cameroon," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(2), pages 89-95, June.
    8. Soldatos, Gerasimos T., 2015. "A Bilateral Monopsony Approach to Lending, and the Hidden Economy in LDCs," MPRA Paper 66896, University Library of Munich, Germany.
    9. Nyamongo, Esman & Ndirangu, Lydia Ndirangu2, 2013. "Financial Innovations and Monetary Policy in Kenya," MPRA Paper 52387, University Library of Munich, Germany.

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    More about this item

    Keywords

    excess bank liquidity; oligopoly loan market; monetary policy;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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