What does excess bank liquidity say about the loan market in Less Developed Countries? / Tarron Khemraj

Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (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 a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.
Stylized Facts -- Oligopoly Banking and Monetary Policy -- Quasi-Calibration Exercise -- Conclusion.

13 p. : graphs

Includes bibliographical references (p. 13).