Premium
Imperfect Competition in Bank Retail Markets, Deposit and Loan Rate Dynamics, and Incomplete Pass Through
Author(s) -
KOPECKY KENNETH J.,
VAN HOOSE DAVID D.
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00527.x
Subject(s) - competition (biology) , loan , imperfect competition , imperfect , economics , interest rate , monetary economics , work (physics) , econometrics , microeconomics , macroeconomics , mechanical engineering , ecology , linguistics , philosophy , biology , engineering
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.