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How do banks set interest rates?

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  • Gambacorta, Leonardo

Abstract

This paper studies cross-sectional differences in banks interest rates. It adds to the literature in two ways. First, it analyzes systematically the micro and macroeconomic factors that influence the price-setting behaviour of banks. Second, by using banks' prices (rather than quantities) it provides an alternative way of disentangling loan supply from loan demand shift in the "bank lending channel" literature. The results suggest that heterogeneity in the banking rates pass-through - depending on liquidity, capitalization and relationship lending - exists only in the short run.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 5 (July)
Pages: 792-819

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Handle: RePEc:eee:eecrev:v:52:y:2008:i:5:p:792-819

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