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

_IMF Working Papers, September 1, 1991_

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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

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### 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*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/testing-a-disequilibrium-model-of-lending-rate-determination-the-case-of-malaysia-963_