Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia
University of Alberta - Department of Marketing, Business Economics & Law
IMF Working Paper No. 91/84
This study examines whether lending rates cleared the market for loans in Malaysia after interest rate liberalization. It is based on a theoretical model in which adverse selection and marginal cost pricing are brought together by the use of a quadratic loss function in the error correction format. This allows for the use of the cointegration methodology. Long-run tests support the model proposed in the paper, while rejecting part of the financial liberalization model. From the short-run results it is concluded that there is a large lag before lending rates respond to exogenous shocks, thus confirming that they do not fully clear the market for loans.
Number of Pages in PDF File: 43
JEL Classification: E10working papers series
Date posted: February 15, 2006
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