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How do anticipated changes to short-term market rates influence banks' retail interest rates? Evidence from the four major euro area economies

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Author Info

  • Banerjee, A.
  • Bystrov, V.
  • Mizen, P.

Abstract

In this paper we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates - a level, slope, curvature model and a principal components model - before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.

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File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT-361-05-2013_01.pdf
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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 361.

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Length: 73 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:361

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: forecasting; factor models; interest rates; pass-through.;

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Cited by:
  1. Enzo Cassino, 2012. "Modelling New Zealand mortgage interest rates?," Reserve Bank of New Zealand Analytical Notes series AN2012/10, Reserve Bank of New Zealand.
  2. Anna Staszewska-Bystrova, 2013. "Modified Scheffé’s Prediction Bands," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(5-6), pages 680-690, October.
  3. Bystrov, Victor, 2013. "A factor-augemented model of markup on mortgage loans in Poland," MPRA Paper 49683, University Library of Munich, Germany.
  4. Arvid Raknerud & Bjørn Helge Vatne, 2013. "The relations between bank-funding costs, retail rates, and loan volumes. Evidence form Norwegian microdata," Discussion Papers 742, Research Department of Statistics Norway.

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