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BOGOEV, Jane
Languages: English
Types: Doctoral thesis
Subjects: L100
ABSTRACT\ud This thesis explores the possibility of conducting a more independent monetary policy through the adoption of an inflation targeting regime in a small, open and Euroised transition economy where banks are dependent on foreign financing. The major aim of this research programme is to investigate the effectiveness and determinants of the interest rate and bank lending channels in the case of Republic of Macedonia, since their effectiveness is seen as one of the preconditions for adoption of an inflation targeting regime. This thesis contributes to the existing literature for transition economies in two main ways. Firstly, it investigates the size and determinants of individual bank‟s lending rate adjustments to changes in the „cost of funds‟ rate. Secondly, it examines two loan functions according to the currency disaggregation of loans, and investigates what bank-specific characteristics are the major determinants. The findings with respect to the first research contribution indicate that the size of the short-run adjustment of lending rates to changes in the „cost of funds‟ rate is quite sluggish and heterogeneous among Macedonian banks. Moreover, bank-specific characteristics and macroeconomic variables play different roles in individual bank‟s lending rate setting decisions. These results are consistent with the presence of aggregation bias in previous research that uses sector-level data, due to the suppression of banks‟ heterogeneous behaviour. The results regarding the second research contribution imply that the bank lending channel in Macedonia works mainly through foreign currency loans and the foreign reference rate, whereas the responsiveness of domestic currency loans to the changes in the domestic reference rate is quite low. Moreover, different banks react differently to changes in the domestic and foreign reference rates due to their specific characteristics. These findings suggest that the impact of domestic monetary policy on the Macedonian economy through the interest rate and bank lending channels is quite limited. Therefore, the current monetary policy regime of a fixed exchange rate may be more effective in achieving the price stability aim than adoption of an inflation targeting regime in economies like Macedonia.
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    • 2.2.1 The mark-up pricing theory...........................................................................................53
    • 2.2.2 Theory of asymmetric information and lending rate stickiness............................60
    • 2.2.3 Switching costs and relationship lending theories...................................................63
    • 2.2.4 “Menu costs” theory........................................................................................................69
    • 2.2.5 A critical assessment of the surveyed theories .........................................................73
    • 2.3 A critical survey of empirical studies .......................................................75
    • 2.3.1 Studies that examine the factors that affect the size of the banks‟ retail rate adjustment (the pass-through multipliers)...............................................................77
    • 2.3.2 Studies that examine the average level of retail rates setting................................91
    • 4.5 Critical assessment of the empirical research ........................................ 196
    • 4.5.1 Assessment of the empirical evidence for the developed economies .............. 197
    • 4.5.2 Assessment of the empirical evidence for transition economies ....................... 203
    • 4.5.3 General criticism of previous empirical studies .................................................... 213
    • 6.2 Main findings of the research ................................................................. 261
    • 6.3 Policy implications .................................................................................. 266
    • 6.4 Limitations of the research ..................................................................... 270
    • 6.5 Further research ..................................................................................... 272
    • 6.6 Contributions to knowledge.................................................................... 273
    • Figure 1.1: Percentage share of foreign-owned banks in total assets for various economies from CSEE, 2007 ........................................................................13
    • Figure 1.23: Movements of the lending and deposit rates in real terms in Macedonia, 1998-2009 (%)...............................................................................................43
    • Figure 1.24: Movements of the nominal lending and deposit interest rates in foreign currency in Macedonia, 2005-2009 (%)........................................................44
    • Figure 1.25: Movements of the interest rate spread between the various types of nominal lending and deposit rates in Macedonia, 1998-2009 (percentage points)............................................................................................................45
    • Figure 1.27: Movements of the country risk premium for the period 2000-2009 (percentage points) ........................................................................................47
    • Table 1.1: Main macroeconomic indicators of the Republic of Macedonia ........................5
    • Table 1.2: Characteristics of the banking sector in Macedonia ...........................................9
    • Table 1.3: HHI for the CSEE economies and the EMU, 2008 ..........................................10
    • Table 1.4: Number of large, medium and small sized banks in Macedonia, 2002-2009...11
    • Table 1.5: EBRD‟s index for banking sector reform and interest rate liberalisation for various economies from CSEE, 2009...........................................................11
    • Table 1.6: Characteristics of the banking sector in Macedonia .........................................12
    • Table 1.7: Periods of conducting “volume tender” and “interest rate tender” auctions of CB Bills, 2000-2009 ................................................................................14
    • Table 1.8: Structure of the total banks‟ securities portfolio...............................................21
    • Table 1.9: The key nominal policy rates of ECB and CSEE economies, end of period (%)................................................................................................................38
    • Table 1.10: Nominal lending and deposit rates in domestic currency for the economies from CSEE, 2004-2009 (%, end of period)..................................................44
    • Table 1.11: Nominal interest rate spread between the lending and deposit rates for the economies from CSEE, 2004-2009 (%, end of period)................................46
    • Table 2.1: Summary table of the studies that apply the two-stage method........................78
    • Table 2.2: Summary of the one-stage estimation studies based on panel models .............85
    • 1.6 Stylised facts about banks‟ outstanding loans to the non-financial private sector in Macedonia............................................................................26
    • Appendix 5.5:
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