IDEAS home Printed from https://ideas.repec.org/p/rba/rbardp/rdp9206.html
   My bibliography  Save this paper

Loan Rate Stickiness: Theory and Evidence

Author

Listed:
  • Philip Lowe

    (Reserve Bank of Australia)

  • Thomas Rohling

    (Reserve Bank of Australia)

Abstract

Financial deregulation in the 1980s saw the lifting of regulations on interest rates charged by banks. In general, lending rates now respond more quickly to changes in banks’ cost of funds than they did in the regulated period. However, lending rates still do not always move one for one with changes in banks’ marginal cost of raising funds. This paper canvasses four theoretical explanations, other than collusive behaviour, for loan rate stickiness. These theories are based on equilibrium credit rationing, switching costs, implicit risk sharing and consumer irrationality. Using regression analysis, we also examine the degree of stickiness of Australian interest rates on secured and unsecured personal loans, credit cards, small and large business overdrafts, and housing loans. We find significant differences in the degree of interest rate stickiness among the different rates, even after allowing for lags in adjustment. The rate on credit cards is found to be the most sticky, followed by personal loan rates, the housing loan rate and the small business overdraft rate. The large business overdraft rate is found to adjust one for one with banks’ marginal cost of funds. We briefly examine the behaviour of selected U.S., U.K. and Canadian interest rates. The general order and magnitude of interest rate stickiness is similar to that found for Australia. Although it is not possible to empirically discriminate between the different theories of loan rate stickiness, we interpret the results as providing strong evidence for the switching cost explanation. In addition, implicit risk sharing probably plays an important role in the stickiness of the housing loan rate.

Suggested Citation

  • Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9206
    as

    Download full text from publisher

    File URL: https://www.rba.gov.au/publications/rdp/1992/pdf/rdp9206.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fried, Joel & Howitt, Peter, 1980. "Credit Rationing and Implicit Contract Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 471-487, August.
    2. Costas Azariadis, 1976. "On the Incidence of Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(1), pages 115-125.
    3. Adrian Blundell-Wignall & Marianne Gizycki, 1992. "Credit Supply and Demand and the Australian Economy," RBA Research Discussion Papers rdp9208, Reserve Bank of Australia.
    4. von Weizsacker, C Christian, 1984. "The Costs of Substitution," Econometrica, Econometric Society, vol. 52(5), pages 1085-1116, September.
    5. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    6. 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.
    7. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    8. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 135-145.
    9. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-1077, October.
    10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    11. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    12. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    13. Jerome Fahrer & Thomas Rohling, 1992. "Some Tests of Competition in the Australian Housing Loan Market," RBA Research Discussion Papers rdp9202, Reserve Bank of Australia.
    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. Richard P.C. Brown & Fabrizio Carmignani, 2015. "Revisiting the Effects of Remittances on Bank Credit: A Macro Perspective," Scottish Journal of Political Economy, Scottish Economic Society, vol. 62(5), pages 454-485, November.
    2. S. Burcu Avci & Eray Yucel, 2017. "Effectiveness of monetary policy: evidence from Turkey," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 179-213, August.
    3. 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.
    4. Karagiannis, Stelios & Panagopoulos, Yannis & Vlamis, Prodromos, 2010. "Interest rate pass-through in Europe and the US: Monetary policy after the financial crisis," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 323-338, May.
    5. Arrunada, Benito & Paz-Ares, Candido, 1997. "Mandatory rotation of company auditors: A critical examination," International Review of Law and Economics, Elsevier, vol. 17(1), pages 31-61, March.
    6. Adams, Paul & Hunt, Stefan & Palmer, Christopher & Zaliauskas, Redis, 2021. "Testing the effectiveness of consumer financial disclosure: Experimental evidence from savings accounts," Journal of Financial Economics, Elsevier, vol. 141(1), pages 122-147.
    7. 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.
    8. Nagesh N. Murthy & Milind Shrikhande & Ajay Subramanian, 2007. "Switching costs, dynamic uncertainty, and buyer–seller relationships," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(8), pages 859-873, December.
    9. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    10. Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
    11. Jane BOGOEV, 2010. "Investigation Of The Determinants Of The Adjustment Of Lending Rates In Macedonia – A Sur Approach," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 6, pages 89-116, December.
    12. Chionis, Dionysios P. & Leon, Costas A., 2006. "Interest rate transmission in Greece: Did EMU cause a structural break?," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 453-466, May.
    13. Miguel Villas-Boas, J., 2015. "A short survey on switching costs and dynamic competition," International Journal of Research in Marketing, Elsevier, vol. 32(2), pages 219-222.
    14. Huck, Steffen & Zhou, Jidong, 2011. "Consumer behavioural biases in competition: A survey," MPRA Paper 31794, University Library of Munich, Germany.
    15. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978.
    16. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
    17. Mengze Shi, 2013. "A theoretical analysis of endogenous and exogenous switching costs," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 205-230, June.
    18. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
    19. Fishman, Arthur & Hellman, Ziv & Weiss, Avi, 2023. "Habit forming consumers and firm dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    20. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.

    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:rba:rbardp:rdp9206. 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: Paula Drew (email available below). General contact details of provider: https://edirc.repec.org/data/rbagvau.html .

    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.