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Interest rate deregulation: Monetary policy efficacy and rate rigidity

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  • Chong, Beng Soon

Abstract

This paper examines the effects of interest rate regulation, and subsequent deregulation, on the efficacy of monetary policy and rigidity of retail bank deposit rates in Hong Kong. Using an error-correction model, we find that interest rate deregulation increases the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long-term pass-through for retail bank deposit rates. Our study also shows that the adjustments in retail bank deposit rates are asymmetric and rigid upwards during the regulated period, but tend to be rigid downwards during the deregulated period. The spreads between retail bank deposit rates and market rates have also tightened sharply after the removal of interest rate controls.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 6 (June)
Pages: 1299-1307

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1299-1307

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Regulation Monetary policy transmission Interest rate pass-through Rate rigidity Asymmetric adjustment Error correction Threshold autoregressive model Bank deposit rates;

References

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  1. Sander,Harald & Kleimeier,Stefanie, 2003. "Convergence in Eurozone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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Citations

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Cited by:
  1. John Ashton & Andros Gregoriou & Jerome V. Healy, 2013. "The relative influence of price and choice factors on retail deposit quantities," Working Papers 13006, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. Liu, Ming-Hua & Margaritis, Dimitris & Tourani-Rad, Alireza, 2011. "Asymmetric information and price competition in small business lending," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2189-2196, September.
  3. Valadkhani, Abbas, 2013. "The pricing behaviour of Australian banks and building societies in the residential mortgage market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 133-151.
  4. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers 2011-03, University of Central Florida, Department of Economics.
  5. Valadkhani, Abbas & Bollen, Bernard, 2013. "An alternative approach to the modelling of interest rate pass through and asymmetric adjustment," Economics Letters, Elsevier, vol. 120(3), pages 491-494.
  6. Arvid Raknerud & Bjørn Helge Vatne & Ketil Rakkestad, 2011. "How do banks' funding costs affect interest margins?," Discussion Papers 665, Research Department of Statistics Norway.
  7. Adams, Robert M. & Amel, Dean F., 2011. "Market structure and the pass-through of the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1087-1096, May.
  8. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, 09.
  9. John Ashton & Andros Gregoriou, 2012. "The Influence of Banking Centralisation on Depositors: Regional Heterogeneities in the Transmission of Monetary Policy," Working Papers 12005, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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