Esteemed colleagues,
I am working on a new project related to financial frictions. Since financial frictions refer to when financial markets are imperfect evidenced by tighter credit constraints can "lending rate" or "interest spread" be used as proxies?
I will appreciate constructive feedback and suggestions.
Thanks.
Ngozi
Interest spread on bank lending is a proxy but I think in the context of Nigeria we can as well use "access to credit information".
James Tumba Henry thanks for the suggestion. I am actually engaging a panel and not a time-series analysis.
Grateful!
Interest rate spread would be better than lending rate, as the latter can be affected by the demand and supply for loans in ways that are unrelated to financial friction (such as economic growth, management's risk appetite, monetary policy, inflation, etc.). By using a spread, you can remove some of these confounding influences. Another variable to consider is total loans or credit as a percentage of GDP where lower values represent greater financial friction in the economy. The IMF Int. Fin. Statistics database has the data to compute this variable and could be used as robustness check.
Dear Ngozi,
Usually "interest rate spread" rather than lending rate is used for this kind of analysis.
Prof. Mazin Al Janabi
EGADE Business School,
Tecnologico de Monterrey
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