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Competition and Interest Rate Ceilings in Commercial Banking

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  • Richard Startz

Abstract

Regulations prohibiting the payment of explicit interest on demand deposits are gradually being eased. As banks switch from payment in the form of free services to explicit interest, both the level of money demand and the response of money demand to market interest rates will change. Banks are modeled here as being Chamberlinian monopolistic competitors. Equilibrium deposit interest rate relationships are found for markets both with and without an effective interest rate ceiling and the behavior of the two markets is compared. The elimination of deposit interest rate ceilings leads to increased money demand and an increased responsiveness of deposit rates to market interest rates.

Suggested Citation

  • Richard Startz, 1983. "Competition and Interest Rate Ceilings in Commercial Banking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 255-265.
    • Handle: RePEc:oup:qjecon:v:98:y:1983:i:2:p:255-265.
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    File URL: http://hdl.handle.net/10.2307/1885624
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    Cited by:

    1. David VanHoose, 2013. "Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant-Bank Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(3), pages 291-316, July.
    2. repec:zbw:bofrdp:1994_018 is not listed on IDEAS
    3. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    4. Noman Arshed & Rukhsana Kalim, 2021. "Modelling demand and supply of Islamic banking deposits," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2813-2831, April.
    5. Pinho, Paulo Soares de, 2000. "The impact of deregulation on price and non-price competition in the Portuguese deposits market," Journal of Banking & Finance, Elsevier, vol. 24(9), pages 1515-1533, September.
    6. Tarkka, Juha, 1994. "Risk sharing in the pricing of payment services by banks," Research Discussion Papers 18/1994, Bank of Finland.
    7. repec:zbw:bofrdp:1989_026 is not listed on IDEAS
    8. Kenneth J. Kopecky & David D. Van Hoose, 2012. "Imperfect Competition in Bank Retail Markets, Deposit and Loan Rate Dynamics, and Incomplete Pass Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1185-1205, September.
    9. Tarkka, Juha, 1989. "Competitive deposit rates and bank service charges," Research Discussion Papers 26/1989, Bank of Finland.
    10. Glennon, Dennis & Lane, Julia, 1996. "Financial innovation, new assets, and the behavior of money demand," Journal of Banking & Finance, Elsevier, vol. 20(2), pages 207-225, March.
    11. Insfrán Pelozo, José Ani­bal, 2008. "Loans, risks, and growth: The role of government and public banking in Paraguay," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(2), pages 307-319, May.
    12. repec:ptu:bdpart:r202011 is not listed on IDEAS
    13. Paulo Esteves & Maximiano Pinheiro, 2020. "Deposit interest rate ceilings," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    14. Dutkowsky, Donald H. & VanHoose, David D., 2013. "Interest on reserves, unregulated interest on demand deposits, and optimal sweeping," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 192-202.
    15. Chateau, Jean-Pierre D., 1990. "Financement dynamique des intermédiaires financiers : l’effet de la volatilité du taux de crédit sur les dépôts de base," L'Actualité Economique, Société Canadienne de Science Economique, vol. 66(1), pages 50-64, mars.
    16. Michael C. Keeley & Gary C. Zimmerman, 1985. "Competition for money market deposit accounts," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 5-27.
    17. Tarkka, Juha, 1994. "Risk sharing in the pricing of payment services by banks," Bank of Finland Research Discussion Papers 18/1994, Bank of Finland.

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