Excess liquidity, oligopolistic loan markets and monetary policy in LDCs / Tarron Khemraj

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 markup 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.
Introduction -- The stylized facts -- Oligopoly banking and monetary policy -- A calibration exercise -- Conclusion.

17 p. : graphs, tables

Includes bibliographical references (p. 15).