DP10230 | Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates

Publication Date

02/11/2014

JEL Code(s)

Keyword(s)

Programme Area(s)

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