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Are there asymmetries in the response of bank interest rates monetary shocks?

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  • Leonardo Gambacorta

    ()
    (Bank of Italy, Economic Research Department)

  • Simonetta Iannotti

    ()
    (Bank of Italy, Supervision and Regulation Department)

Abstract

This paper examines the velocity and asymmetry in the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), it analyses the pass-through of changes in the money market rates to retail bank interest rates in Italy in the period 1985-2002. The main results of the paper are: 1) the speed in adjustment of bank interest rates to monetary policy changes have significantly increased after the introduction of the 1993 Consolidated Law on Banking; 2) interest rate adjustment, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run; 3) banks adjust their loan (deposit) rate at a faster rate during period of monetary tightening (easing); 4) this asymmetry has almost vanished since the nineties.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 566.

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Date of creation: Nov 2005
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Handle: RePEc:bdi:wptemi:td_566_05

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Web page: http://www.bancaditalia.it
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Keywords: monetary policy transmission; interest rates; asymmetries; liberalization;

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References

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  1. Mitchell Berlin & Loretta J. Mester, 1997. "Deposits and relationship lending," Working Papers 96-18, Federal Reserve Bank of Philadelphia.
  2. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
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  9. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
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  12. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
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  16. Stephen D. Oliner & Glenn D. Rudebusch, 1994. "Is there a broad credit channel for monetary policy?," Working Paper Series / Economic Activity Section 146, Board of Governors of the Federal Reserve System (U.S.).
  17. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18.
  18. Carlo Cottarelli & Giovanni Ferri & Andrea Generale, 1995. "Bank Lending Rates and Financial Structure in Italy: A Case Study," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 670-700, September.
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Cited by:
  1. Leuvensteijn, Michiel van & Bikker, Jacob A. & Rixtel, Adrian A.R.J.M. van & Kok-Sørensen, Christoffer, 2007. "A new approach to measuring competition in the loan markets of the euro area," CEI Working Paper Series 2007-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  2. Riccardo Bonci & Francesco Columba, 2007. "The Effects Of Monetary Policy Shocks On Flow Of Funds:The Italian Case," Money Macro and Finance (MMF) Research Group Conference 2006 75, Money Macro and Finance Research Group.
  3. Gianluca Di Lorenzo & Giuseppe Marotta, 2006. "Multiple breaks in lending rate pass-through A cross country study for the euro area," Heterogeneity and monetary policy 0602, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
  4. 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," Department of Economics 0549, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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