What does excess bank liquidity say about the loan market in Less Developed Countries?
Tarron Khemraj Abstract 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. JEL Classification: O10; O16; E52; G21; L13 Keywords: Excess bank liquidity, oligopoly banking, loan market, monetary policy Tarron Khemraj is Assistant Professor of Economics at the New Col ege of Florida (the Honours Col ege of Florida State University). E-mail: tkhemraj@ncf.edu. The author grateful y acknowledges the valuable c
