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Evidence about developing countries' commercial banks' liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum markup rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a markup over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum markup loan rate is consistent with the observed stylized facts.

This paper develops a conceptual framework and presents three case studies that show how differences in economic structures are the fundamental cause of differences in economic development. This insight is derived from a synthesis of competing hypotheses. A given economic structure gives rise to a particular distribution of income-an important source of de facto political power. The mechanics of economic change or persistence are in turn determined by the intensity of competition between de facto and de jure political powers and the resolution to this contestation. We use historical evidence to show that geography played a pivotal role in shaping economic structures and demonstrate that geography is still important in explaining the Guyana-Barbados divergence. In the case of Mauritius, it was the good fortune of sugar rents that gave rise to a distributional bargain and institutions of production (industrial policies) that led to the Mauritian miracle.

This paper examines why commercial banks in Guyana demand non-remunerated excess reserves, a phenomenon that became even more widespread after financial liberalisation. Despite the removal of capital controls, banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. The findings suggest that commercial banks do not demand excess reserves for precautionary purpose -which is the conclusion of several other studies -but rather because of the maintained constraint. The estimated sterilisation coefficient is consistent with the hypothesis of an enforced constraint. The results, moreover, suggest an alternative way of looking at the monetary transmission mechanism in developing countries. The central bank maintains price and exchange rate stability through the accumulation of foreign reserves.

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