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

51 Pages Posted: 3 Nov 2014

See all articles by Prachi Mishra

Prachi Mishra

International Monetary Fund (IMF) - Research Department

Peter J. Montiel

Williams College - Department of Economics

Peter L. Pedroni

Williams College

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute

Date Written: November 2014

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

Keywords: bank lending, monetary policy, structural panel VAR

JEL Classification: E5, O11, O16

Suggested Citation

Mishra, Prachi and Montiel, Peter J. and Pedroni, Peter L. and Spilimbergo, Antonio, Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates (November 2014). CEPR Discussion Paper No. DP10230. Available at SSRN: https://ssrn.com/abstract=2518716

Prachi Mishra (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Peter J. Montiel

Williams College - Department of Economics ( email )

Fernald House
Office: Fernald 14
Williamstown, MA 01267
United States
413-597-2103 (Phone)
413-597-4045 (Fax)

HOME PAGE: http://www.williams.edu/Economics/faculty/montiel.htm

Peter L. Pedroni

Williams College ( email )

Williamstown, MA 01267
United States

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6346 (Phone)
202-623-6336 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Michigan at Ann Arbor - The William Davidson Institute ( email )

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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