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Title: Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates

Author(s): Prachi Mishra, Peter J Montiel, Peter Pedroni and Antonio Spilimbergo

Publication Date: November 2014

Keyword(s): bank lending, monetary policy and structural panel VAR

Programme Area(s): Financial Economics, International Macroeconomics and International Trade and Regional Economics

Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies

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Bibliographic Reference

Mishra, P, Montiel, P, Pedroni, P and Spilimbergo, A. 2014. 'Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10230