DOES BANK LENDING RATE PROPAGATE ECONOMIC CYCLES IN DEVELOPING COUNTRIES WITH HIGH FOREIGN DEBTS?

Sang H. Lee KIMEP University

Mohammad Mujibul Haque Kazakh British Technical University

ABSTRACT

In this study, bank lending rates of 50 developing countries are analyzed for their effects of economic propagation. These countries are divided into two groups of high and low foreign debt levels, and the differential impact of lending rate on the economy is analyzed to see if there exists an accelerating impact on the economies of high foreign debt countries by the external finance premium in the lending rate. The results are mixed, possibly due to the mitigating effect that, banks can effectively reduce asymmetric information problems in credit market by monitoring their borrowers through long-term customer relationships and line-of-credit arrangement. In addition, the bank lending rates might have been used as a monetary tool to counter the negative developments of economic conditions in these countries. During the pre-crisis period when banks’ risk appetite and liabilities are growing, the lending rate shows a stronger feedback effect upon initial economic shock in the high foreign debt countries, and provides room for economic propagation with the countercyclical movement of the external finance premium in the lending rate. During the crisis and post-crisis periods, however, sufficient evidence is not found for the accelerating impact in the high foreign debt countries.