I contribute to the ongoing policy discourse on the challenges of monetary policy transmission in environments with consolidated financial sectors and high credit rates. I empirically investigate the lending rate pass-through in Azerbaijan – a small resource-rich economy in transition – by taking advantage of a unique set of high-frequency bank-level data. My bottom-line policy message is the following. First, lending rates are considerably irresponsive to monetary policy shocks, and the interest rate channel ought to be somehow improved. Second, macroeconomic fundamentals and the concentrated bank sector are surprisingly not among the reasons behind the policy-market disconnect. Third, domestic commercial banks are able to exert substantial monopolistic pricing capacities and keep credit rates high, particularly when the central bank loosens its policy stance. Fourth, the underlying cause of both monetary policy inefficacy and high interest rate stickiness appears to be structural excess liquidity. In fact, empirical results show that pass-through is substantially higher for less liquid banks. Extraction of excess liquidity from the system should mitigate the banks’ monopolistic pricing powers, improve the efficiency of the interest rate channel, and ultimately bring the credit rates down.
I am thankful to Peter Kugler of the University of Basel, Ulrich Camen of the Graduate Institute of International and Development Studies (IHEID), Carlos Lenz, Herman Werner, Marcel Savioz, and Gilbert Heim of the Swiss National Bank, and all participants of the monetary transmission seminar held at the Swiss National Bank in October, 2012, for very insightful comments. I am also grateful to Emin Huseynov, Vugar Ahmadov, Shaig Adigozalov, Nadir Ramazanov, Mehdi Mehdiyev, Ramiz Rahmanov, Salman Huseynov, Rashad Karimov, Leyla Yusifzadeh, and all other members of the Research Department at the Central Bank of Azerbaijan for numerous consultations and informal discussions. This paper was started when I was a researcher at the Central Bank of Azerbaijan and later a graduate student at the London School of Economics. Opinion expressed in this paper is solely my own and does not in any way represent the views of the State Oil Fund of Azerbaijan, the Central Bank of Azerbaijan, or any other institution or individual but myself. All errors are, of course, my own.
Jamilov, R. (2015), "Lending Rate Pass-through and Bank Heterogeneity in a High Interest Rate Environment: Evidence from Azerbaijan", Neo-Transitional Economics (International Finance Review, Vol. 16), Emerald Group Publishing Limited, Bingley, pp. 193-217. https://doi.org/10.1108/S1569-376720150000016009
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