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How Do Anticipated Changes to Short‐Term Market Rates Influence Banks' Retail Interest Rates? Evidence from the Four Major Euro Area Economies
Author(s) -
BANERJEE ANINDYA,
BYSTROV VICTOR,
MIZEN PAUL
Publication year - 2013
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/jmcb.12056
Subject(s) - yield curve , interest rate , futures contract , economics , order (exchange) , yield (engineering) , futures market , term (time) , monetary economics , econometrics , financial economics , finance , materials science , physics , quantum mechanics , metallurgy
In this paper, we argue that banks anticipate short‐term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates—a level, slope, curvature model, and a principal components model—before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.