Monetary Policy in a Developing Country: Loan Applications and Real Effects

IMF Working Papers, December 23, 2015

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Monetary Policy in a Developing Country: Loan Applications and Real Effects

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Bibliographic details

• Authors: Charles Abuka, Ronnie K Alinda, Camelia Minoiu, José-Luis Peydró, Andrea F Presbitero
• Published: December 23, 2015
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513529813.001

Study scope and data

• Country and period analyzed: Uganda during 2010–2014.
• Data source: supervisory dataset of loan applications and granted loans.
• Event focus: a short period during which the policy rate rose by 1,000 basis points and then came down by 1,200 basis points.
• Authors: Charles Abuka, Ronnie K Alinda, Camelia Minoiu, José-Luis Peydró, Andrea F Presbitero.
• Publication details:
  • Publication type: IMF Working Paper No. 2015/270.
  • Date: December 23, 2015.
  • Pages: 36.
  • Volume: 2015.
  • Issue: 270.
  • DOI: https://doi.org/10.5089/9781513529813.001
  • ISBN: 9781513529813
  • ISSN: 1018-5941
  • Stock No: WPIEA2015270

Main empirical findings

• Transmission impairment:
  • Monetary policy transmission to credit aggregates and the real economy can be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system.
• Bank lending channel evidence:
  • An increase in interest rates reduces the supply of bank credit on both the extensive margin (fewer loans granted) and the intensive margin (smaller loan amounts).
  • There is significant pass-through from policy interest rates to retail lending rates.
• Bank balance sheet channel:
  • A strong bank balance sheet channel is documented: the lending behavior of banks with high capital and liquidity is different from the lending behavior of banks with low capital and liquidity.
• Real activity heterogeneity:
  • The impact of monetary policy on real activity across districts depends on banking sector conditions.
• Overall conclusion:
  • Results indicate significant real effects of the bank lending channel in developing countries.

Key concepts and subjects covered

• Subject tags from the source:
  • Asset and liability management
  • Bank credit
  • Banking
  • Credit
  • Financial institutions
  • Financial statements
  • Liquidity
  • Loans
  • Money
  • Public financial management (PFM)
• Keywords from the source:
  • bank balance
  • Bank balance sheet channel
  • bank capital
  • Bank credit
  • Bank lending channel
  • Credit
  • demand shock
  • Developing countries
  • East Africa
  • Financial statements
  • lending rate
  • Liquidity
  • Loans
  • market power
  • Monetary policy transmission
  • Sub-Saharan Africa
  • WP

Policy implications and interpretation

• Monetary policy effectiveness:
  • In environments with weak contracting frameworks, shallow financial markets, and concentrated banking systems, conventional monetary policy actions can significantly affect credit supply and real activity through the bank lending channel.
• Role of bank balance sheets:
  • Policymakers should consider bank capital and liquidity positions when assessing monetary policy transmission and potential real economy effects.
• Geographic heterogeneity:
  • Regional or district-level banking conditions can shape heterogeneous real effects of uniform monetary policy actions.

Source: IMF Working Paper No. 2015/270, "Monetary Policy in a Developing Country: Loan Applications and Real Effects" (December 23, 2015).

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