Does Foreign Bank Entry Affect Monetary Policy Effectiveness?: Exploring the Interest Rate Pass-Through Channel

HKUST IEMS Working Papers No. 2015-06

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Sasidaran Gopalan, Ramkishen S. Rajan

This paper explores the impact of foreign bank entry on interest-rate-pass-through for a panel of 57 emerging and developing economies over 1995-2009. The paper tests for possible thresholds in terms of foreign bank presence that differentially impact interest-rate pass-through. The empirical results suggest that there are strong threshold effects in that foreign bank entry tends to enhance interest rate pass-through only in countries with greater degree of foreign bank presence compared to those with limited entry. The paper also finds that when foreign bank entry leads to greater banking concentration, it significantly lowers the extent of interest rate transmission.

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