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Interest rate transmission in the UK: a comparative analysis across financial firms and products

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  • Ana-Maria Fuertes

    (Cass Business School, City University London, UK)

  • Shelagh A. Heffernan

    (Cass Business School, City University London, UK)

Abstract

This paper differentiates itself from the existing literature by testing for heterogeneities in the interest rate transmission mechanism using a large sample of 662 monthly retail rate histories (1993-2004) on seven key deposit and loan products. Error correction models are estimated to analyse the long-run pass-through, the long-run mark-up and the short-run speed of adjustment. The prediction that the official and retail rates move together in the long run is supported by the data. The evidence suggests weak between-product heterogeneity but notable differences were found between financial firms in the way they adjust their rates, which could hinder the achievement of monetary policy objectives. Consumer responses to official rate changes could therefore be more phased and intricate than hitherto believed. Heterogeneity in adjustment is found to be linked to menu costs and key financial ratios under managerial control. Copyright © 2008 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 1 ()
Pages: 45-63

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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:1:p:45-63

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Web page: http://www.interscience.wiley.com/jpages/1076-9307/

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References

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Cited by:
  1. David ARISTEI & Manuela Gallo, 2012. "Interest Rate Pass-Through in the Euro Area during the Financial Crisis: a Multivariate Regime-Switching Approach," Quaderni del Dipartimento di Economia, Finanza e Statistica 107/2012, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
  2. 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).
  3. Leo Haan & Elmer Sterken, 2011. "Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market," Journal of Financial Services Research, Springer, vol. 39(3), pages 145-159, June.
  4. 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).
  5. Ana-Maria Fuertes & Shelagh Heffernan & Elena Kalotychou, 2010. "How do UK Banks React to Changing Central Bank Rates?," Journal of Financial Services Research, Springer, vol. 37(2), pages 99-130, June.
  6. Iva Cecchin, 2011. "Mortgage Rate Pass-Through in Switzerland," Working Papers 2011-08, Swiss National Bank.

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