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Market power and bank interest rate adjustments

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Author Info

  • Raquel Lago-González

    ()
    (Banco de España)

  • Vicente Salas-Fumás

    ()
    (Banco de España
    Universidad de Zaragoza)

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    Abstract

    Evidence is presented on the long and short run relationship between the money market interest rate and loan and deposit interest rates charged by individual Spanish banks between 1988 and 2003. The results indicate that such relationships have been determined by a mixture of adjustment costs and market power of banks, which creates interest rate rigidity and asymmetries in the speed at which increases and decreases in the money market interest rate are translated into banking interest rates. We also find that the price adjustment speed first decreases and later increases with market concentration, which is consistent with predictions from models that assume quantity adjustment costs.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0539e.pdf
    File Function: First version, November 2005
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0539.

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    Length: 40 pages
    Date of creation: Nov 2005
    Date of revision:
    Handle: RePEc:bde:wpaper:0539

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    Web page: http://www.bde.es/
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    Related research

    Keywords: interest rates rigidity; quantity adjustment costs; market power; market concentration;

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    References

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    Citations

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    Cited by:
    1. Giuseppe Marotta, 2006. "Structural breaks in the interest rate pass-through and the euro. A cross-country study in the euro area and the UK," Heterogeneity and monetary policy 0612, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
    2. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian van Rixtel, 2008. "Impact of bank competition on the interest rate pass-through in the euro area," Banco de Espa�a Working Papers 0828, Banco de Espa�a.
    3. Gianluca Di Lorenzo & Giuseppe Marotta, 2006. "Multiple breaks in lending rate pass-through A cross country study for the euro area," Department of Economics 0524, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    4. Giuseppe Marotta, 2008. "Structural breaks in the lending interest rate pass-through and the euro," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08031, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".

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