TITLE:
Economic Freedom and the Determinants of the Bank Spread in South America
AUTHORS:
Vladimir Fernandes-Maciel, Ulisses Ruiz De-Gamboa, Rafael Estevão Garcia-Alves
KEYWORDS:
Banking Spread, Economic Freedom, South America, Panel Data, VAR
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.6,
December
30,
2022
ABSTRACT: This paper performs panel data analysis to test the
existence of an inverse relationship between bank spreads and the degree of
economic freedom in South American countries between 2000 and 2020. In the late
1990s, South America began a process of financial sector reforms, which
included in almost all countries the liberalization of interest rates (instead
of capping) and the elimination of direct credit allocation mechanisms. By
hypothesis, it is expected that the greater the economic freedom, the lower the
degree of financial regulation. This would reduce the transaction costs of
financial institutions and contribute to reducing the banking spread
(assuming constant credit risk). The traditional methodology is applied here,
complemented by unit root and cointegration tests, in addition to
impulse-response function analysis, in the context of panel autoregressive
vectors (VAR). The results show that economic freedom and monetary credibility
(component area of the EFW, Economic
Freedom of the World index) negatively affect the value of the spread, with
long-run effects as well.