A theory of linkage between monetary policy and banking failure in developing countries

Journal of Financial Economic Policy - Tập 1 Số 2 - Trang 143-154 - 2009
Raulin L.Cadet1
1Center for Research in Economics and Management (CREM – CNRS UMR 6211), University of Rennes 1, Cedex, France University of Quisqueya (UniQ), Port‐au‐Prince, Haiti

Tóm tắt

PurposeThe purpose of this paper is to present a model that studies the impact of a tightening monetary policy on banking failure in a developing country.Design/methodology/approachThe interest rate on treasury bills is included in the model to measure monetary policy. Since the model considers developing countries with low‐income level, the paper assumes that a secondary market does not exist.FindingsThe model shows that, despite treasury bills constituting an alternative source of profit for banks in developing countries, a tightening monetary policy increases the probability of banking failure. In addition, the model shows that efficiency level explains the asymmetric effect of monetary policy on the profit of the banks.Practical implicationsThe policy implication of the results of the paper is that the central bank should take into account the adverse effect of a tightening monetary policy on banking failure, when planning policy decisions.Originality/valueThe paper offers insights into the linkage between monetary policy and banking failure in developing countries.

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Thông tin xuất bản

Journal of Financial Economic Policy

Tập 1 Số 2

143-154

Thông tin tác giả