Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

PurposeThis study aims to explore the impact of monetary policy on bank lending rate with the moderating effects of financial sector development for eight Asian developing economics. Design/methodology/approachThis study uses panel autoregressive distributed lag/pooled mean group estimation over the period ranging from 1980 to 2020. FindingsThe empirical results exhibit an inverse link between monetary policy measured by broad money supply on the bank lending rate, indicating that the increase in the money supply by the central bank lowers the demand for loans and thereby lowers the cost of loan. Moreover, financial sector development decreases the lending rate and thus lowers cost of loan. It is also noted that the interactive term of monetary policy by lending broad money supply and financial sector development showed a positive impact on the lending rate in selected Asian developing countries during the period under the study. Practical implicationsThe outcomes have many relevant policy implications that stronger financial development sector contributes to the efficiency of monetary policy. Regulators and policymakers are therefore recommended to pursue greater financial sector development to lower the cost for fund searchers and to lower the cost of loans, money supply increase is suggested. Originality/valueThis study contributes to the extant literature on the factors affecting lending rate with the prime aims of monetary policy effectiveness. This study also included financial sector development with some other variables and an interactive term of monetary policy with financial development to have new insight impact of both on the lending rate in developing Asian economies.

Automated summary

This study investigates the impact of monetary policy on bank lending rate, considering the moderating effects of financial sector development. The findings suggest that an increase in money supply by the central bank leads to a decrease in loan demand and thus lowers the cost of loans. Additionally, financial sector development is found to lower the lending rate and the cost of loans. The interaction between monetary policy and financial sector development also has a positive impact on the lending rate in selected Asian developing countries.