Monetary Policy in a Developing Country
The transmission of monetary policy to credit aggregates and the real economy can be impaired by weaknessesin the contracting environment, shallow financial markets, and a concentrated banking system. We empiricallyassess the bank lending channel in Uganda during 2010-2014 using a supervisory dataset of loan applicationsand granted loans. Our analysis focuses on a short period during which the policy rate rose by 1,000 basis pointsand then came down by 1,200 basis points. We find that an increase in interest rates reduces the supply of bankcredit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates.We document a strong bank balance sheet channel, as the lending behavior of banks with high capital andliquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetarypolicy on real activity across districts depends on banking sector conditions. Overall, our results indicatesignificant real effects of the bank lending channel in developing countries.
