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Working Paper - 211 - Bank Lending Channel of Monetary Policy Transmission in Zambia: Evidence from Bank-Level Data


Monetary policy, acting through various channels, has important macroeconomic and welfare implications. Studies have identified different channels of monetary policy transmission, broadly classified as ‘price’ and ‘credit’ transmission channels (Cecchetti, 1995; Bernanke & Gertler, 1995)4 . The applicability of these channels varies across countries, largely due to differences in level of financial sophistication, intensity of government regulation, and macroeconomic and structural conditions, among other factors. Therefore, understanding the mechanism through which monetary policy is propagated is essential in achieving the key objectives of the central bank and enhancing macroeconomic stability in the economy. This is particularly imperative for Zambia, and developing countries in general, where lack of well-functioning financial markets limit the effectiveness of monetary policy actions. According to Cottalerri and Kourelis (1994) financial markets in low-income countries tend to be less flexible to lending rates, thereby, limiting the effectiveness of monetary policy transmission mechanism.

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