Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia

IMF Working Papers, September 1, 1991

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Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia

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Bibliographic details

• Authors: Barry Scholnick
• Published: September 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451954364.001

Study overview

• Examines whether lending rates cleared the market for loans in Malaysia after interest rate liberalization.
• Based on a theoretical model integrating adverse selection and marginal cost pricing via a quadratic loss function in the error correction format.
• Uses the cointegration methodology to test long-run relationships and short-run dynamics.

Methodology

• Theoretical framework: adverse selection + marginal cost pricing combined through a quadratic loss function in an error correction format.
• Econometric approach: cointegration methodology and error-correction modeling to separate long-run equilibrium relationships from short-run adjustments.

Key findings

• Long-run tests
  • Support the model proposed in the paper.
  • Reject part of the financial liberalization model.
• Short-run results
  • There is a large lag before lending rates respond to exogenous shocks.
  • Conclusion: lending rates do not fully clear the market for loans in Malaysia in the short run.

Policy implications / Interpretation

• Interest rate liberalization alone may not ensure that lending rates adjust quickly to clear loan markets.
• Presence of adverse selection and marginal cost pricing considerations can slow the pass-through of shocks to lending rates, implying potential persistence of credit rationing or market disequilibrium after liberalization.
• Monitoring short-run frictions and addressing information asymmetries may be important to improve the responsiveness of lending rates.

Key publication facts

• Author: Barry Scholnick
• Publication date: September 1, 1991
• Series: IMF Working Papers, Working Paper No. 1991/084
• Volume: 1991; Issue: 084; Pages: 43
• DOI: https://doi.org/10.5089/9781451954364.001
• ISBN: 9781451954364
• ISSN: 1018-5941

Source: Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia, Barry Scholnick, September 1, 1991. DOI: https://doi.org/10.5089/9781451954364.001