Abstract
Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterized by very low monetary rates. The current state of close-to-zero monetary rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows comparing it with the error correction model.
Highlights
Monetary policies, such as variations in the official rate or liquidity injections, cause changes in monetary interest rates
Our results show that the error correction model performs quite well in a predictive sense
We have collected monthly time series data on monetary rates and on aggregate bank deposits administered rates from the statistical database provided by the Bank of Italy, for the period ranging from January 1999 to December 2014
Summary
Monetary policies, such as variations in the official rate or liquidity injections, cause changes in monetary interest rates. These changes impact the economy mainly in an indirect way, through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. This dynamics has been the subject of an extensive literature; the available studies differ, depending on the used models, the period under analysis and the geographical reference. The relationship between market rates and administered rates is a complicated one and the evidence presented, far, is mixed and inconclusive. [1], for example, examines the deposit rate setting behaviour of commercial banks in the United States and finds that a) banks in more concentrated markets exhibit greater rates rigidity; b) larger banks exhibit less rates rigidity; and c) deposit rates are more rigid upwards than downwards. [2], finds that deposit rates are more rigid when they are below their equilibrium level than when they are above; his finding on lending rate adjustment, is mixed. [3] examines how the lending and deposit rates of four banks and three building societies respond to changes in the base rate set by the Bank of England and finds that a) there is very little evidence on the asymmetric nature of adjustments in both the deposit and lending rates; b) there is no systematic difference in the administered rate pricing dynamics of banks and building societies; and c) the adjustment speed for deposit rates is, on average, roughly the same as that for loan rates
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
