IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v44y2012i6p1185-1205.html
   My bibliography  Save this article

Imperfect Competition in Bank Retail Markets, Deposit and Loan Rate Dynamics, and Incomplete Pass Through

Author

Listed:
  • KENNETH J. KOPECKY
  • DAVID D. VAN HOOSE

Abstract

This paper examines determinants of pass through from the market interest rate to bank retail deposit and loan rates. A dynamic adjustment cost model with imperfect competition implies that these rates depend on own lagged values and on lagged, current, and expected future values of the security rate. Greater competition in retail markets reduces the impact of lagged and expected rates on current retail rates while raising the effect of the current security rate, yielding greater pass through. These results have important implications for both the specifications used in empirical work and biases introduced into estimates of pass‐through effects.

Suggested Citation

  • Kenneth J. Kopecky & David D. Van Hoose, 2012. "Imperfect Competition in Bank Retail Markets, Deposit and Loan Rate Dynamics, and Incomplete Pass Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1185-1205, September.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:6:p:1185-1205
    DOI: 10.1111/j.1538-4616.2012.00527.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1538-4616.2012.00527.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1538-4616.2012.00527.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bondt Gabe J. de, 2005. "Interest Rate Pass-Through: Empirical Results for the Euro Area," German Economic Review, De Gruyter, vol. 6(1), pages 37-78, February.
    2. Egert, Balazs & Crespo-Cuaresma, Jesus & Reininger, Thomas, 2007. "Interest rate pass-through in central and Eastern Europe: Reborn from ashes merely to pass away?," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 209-225.
    3. repec:bla:econom:v:64:y:1997:i:254:p:211-31 is not listed on IDEAS
    4. Mr. Nikoloz Gigineishvili, 2011. "Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?," IMF Working Papers 2011/176, International Monetary Fund.
    5. Charles Kahn & George Pennacchi & Ben Sopranzetti, 1999. "Bank Deposit Rate Clustering: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2185-2214, December.
    6. Scholnick, Barry, 1996. "Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 485-496, June.
    7. Perloff,Jeffrey M. & Karp,Larry S. & Golan,Amos, 2007. "Estimating Market Power and Strategies," Cambridge Books, Cambridge University Press, number 9780521011143, November.
    8. Hulsewig, Oliver & Mayer, Eric & Wollmershauser, Timo, 2006. "Bank loan supply and monetary policy transmission in Germany: An assessment based on matching impulse responses," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2893-2910, October.
    9. Charles Kahn & Ben Sopranzetti, 2005. "Bank Consolidation and the Dynamics of Consumer Loan Interest Rates," The Journal of Business, University of Chicago Press, vol. 78(1), pages 99-134, January.
    10. Richard Startz, 1983. "Competition and Interest Rate Ceilings in Commercial Banking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 255-265.
    11. Peter Winker, 1999. "Sluggish adjustment of interest rates and credit rationing: an application of unit root testing and error correction modelling," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 267-277.
    12. Cosimano, Thomas F. & Van Huyck, John B., 1989. "Dynamic monetary control and interest rate stabilization," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 53-63, January.
    13. Rosen, Richard J., 2007. "Banking market conditions and deposit interest rates," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3862-3884, December.
    14. Chami, Ralph & Cosimano, Thomas F., 2010. "Monetary policy with a touch of Basel," Journal of Economics and Business, Elsevier, vol. 62(3), pages 161-175, May.
    15. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 657-680.
    16. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
    17. Linda A. Toolsema & Jan-Egbert Sturm & Jakob de Haan & Jakob de Haan, 2001. "Convergence of Monetary Transmission in EMU New Evidence," CESifo Working Paper Series 465, CESifo.
    18. Ms. Angeliki Kourelis & Mr. Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 1994/039, International Monetary Fund.
    19. Karlo Kauko, 2005. "Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data," Finance 0508020, University Library of Munich, Germany.
    20. Mojon, Benoît & Valla, Natacha & de Bondt, Gabe, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series 518, European Central Bank.
    21. Elyasiani, Elyas & Kopecky, Kenneth J & VanHoose, David, 1995. "Costs of Adjustment, Portfolio Separation, and the Dynamic Behavior of Bank Loans and Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 955-974, November.
    22. Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April.
    23. Halil Ibrahim Aydin, 2007. "Interest Rate Pass-Through in Turkey," Working Papers 0705, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    24. repec:bla:econom:v:71:y:2004:i::p:99-123 is not listed on IDEAS
    25. Goodfriend, Marvin, 1983. "Discount window borrowing, monetary policy, and the post-October 6, 1979 federal reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 343-356, September.
    26. Cosimano, Thomas F., 1988. "The banking industry under uncertain monetary policy," Journal of Banking & Finance, Elsevier, vol. 12(1), pages 117-139, March.
    27. Hannan, Timothy H. & Liang, J. Nellie, 1993. "Inferring market power from time-series data : The case of the banking firm," International Journal of Industrial Organization, Elsevier, vol. 11(2), pages 205-218, June.
    28. Hutchison, David E, 1995. "Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 217-231, February.
    29. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
    30. repec:zbw:bofrdp:2005_009 is not listed on IDEAS
    31. Johann Burgstaller, 2005. "Interest rate pass-through estimates from vector autoregressive models," Economics working papers 2005-10, Department of Economics, Johannes Kepler University Linz, Austria.
    32. Cosimano, Thomas F, 1987. "The Federal Funds Market under Bank Deregulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 326-339, August.
    33. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
    34. Ott, Hervé, 2007. "Three Empirical Essays on House Prices in the Euro Area," Munich Dissertations in Economics 6800, University of Munich, Department of Economics.
    35. Sander, Harald & Kleimeier, Stefanie, 2006. "Convergence of interest rate pass-through in a wider euro zone?," Economic Systems, Elsevier, vol. 30(4), pages 405-423, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Horváth, Roman & Podpiera, Anca, 2012. "Heterogeneity in bank pricing policies: The Czech evidence," Economic Systems, Elsevier, vol. 36(1), pages 87-108.
    2. Putkuri, Hanna, 2010. "Housing loan rate margins in Finland," Research Discussion Papers 10/2010, Bank of Finland.
    3. repec:zbw:bofrdp:2010_010 is not listed on IDEAS
    4. Zulkhibri, Muhamed, 2012. "Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions," Journal of Asian Economics, Elsevier, vol. 23(4), pages 409-422.
    5. Petrevski, Goran & Bogoev, Jane, 2012. "Interest rate pass-through in South East Europe: An empirical analysis," Economic Systems, Elsevier, vol. 36(4), pages 571-593.
    6. Rutayisire, Musoni J., 2017. "Modelling interest rate pass-through in Rwanda: is the interest rate dynamics symmetric or asymmetric ?," MPRA Paper 90178, University Library of Munich, Germany, revised 23 Sep 2018.
    7. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian A.R.J.M. van Rixtel, 2013. "Impact of bank competition on the interest rate pass-through in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(11), pages 1359-1380, April.
    8. Aurélien Leroy & Yannick Lucotte, 2016. "Structural and Cyclical Determinants of Bank Interest-Rate Pass-Through in the Eurozone," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(2), pages 196-225, June.
    9. Jamilov, Rustam & Égert, Balázs, 2014. "Interest rate pass-through and monetary policy asymmetry: A journey into the Caucasian black box," Journal of Asian Economics, Elsevier, vol. 31, pages 57-70.
    10. Anindya Banerjee & Victor Bystrov & Paul Mizen, 2013. "How Do Anticipated Changes to Short‐Term Market Rates Influence Banks' Retail Interest Rates? Evidence from the Four Major Euro Area Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1375-1414, October.
    11. Aristei, David & Gallo, Manuela, 2014. "Interest rate pass-through in the Euro area during the financial crisis: A multivariate regime-switching approach," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 273-295.
    12. Putkuri, Hanna, 2010. "Housing loan rate margins in Finland," Bank of Finland Research Discussion Papers 10/2010, Bank of Finland.
    13. Perera, Anil & Wickramanayake, J., 2016. "Determinants of commercial bank retail interest rate adjustments: Evidence from a panel data model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 1-20.
    14. Andries, Natalia & Billon, Steve, 2016. "Retail bank interest rate pass-through in the euro area: An empirical survey," Economic Systems, Elsevier, vol. 40(1), pages 170-194.
    15. Heinzelmann Ludwig & Missong Martin, 2020. "Nonlinear interest rate-setting behaviour of German commercial banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(3), pages 1-28, June.
    16. repec:zbw:bofrdp:2009_027 is not listed on IDEAS
    17. Rocha, Manuel Duarte, 2012. "Interest rate pass-through in Portugal: Interactions, asymmetries and heterogeneities," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 64-80.
    18. Enzo Dia, 2004. "Monopolistic Pricing in the Banking Industry: a Dynamic Model," Working Papers 73, University of Milano-Bicocca, Department of Economics, revised May 2004.
    19. Belke, Ansgar & Beckmann, Joscha & Verheyen, Florian, 2013. "Interest rate pass-through in the EMU – New evidence from nonlinear cointegration techniques for fully harmonized data," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 1-24.
    20. Ansgar Belke & Joscha Beckmann & Florian Verheyen, 2012. "Interest Rate Pass-Through in the EMU – New Evidence from Nonlinear Cointegration Techniques for Fully Harmonized Data," Ruhr Economic Papers 0350, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    21. Hennecke, Peter, 2017. "Zinstransmission in der Niedrigzinsphase: Eine empirische Untersuchung des Zinskanals in Deutschland," Thuenen-Series of Applied Economic Theory 150, University of Rostock, Institute of Economics.
    22. Dilem Yildirim, 2012. "Interest Rate Pass-Through to Turkish Lending Rates: A Threshold Cointegration Analysis," ERC Working Papers 1207, ERC - Economic Research Center, Middle East Technical University, revised Sep 2012.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jmoncb:v:44:y:2012:i:6:p:1185-1205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.