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

Abstract

Purpose

This 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/approach

This study uses panel autoregressive distributed lag/pooled mean group estimation over the period ranging from 1980 to 2020.

Findings

The 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 implications

The 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/value

This 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.

Citation

Khan, M.A., Khan, Z. and Saleem, S.F. (2023), "Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development", Journal of Financial Economic Policy, Vol. 15 No. 3, pp. 226-247. https://doi.org/10.1108/JFEP-01-2023-0021