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Concentration and Price Rigidity: Evidence for the Deposit Market in Chile

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  • Solange Berstein
  • Rodrigo Fuentes

Abstract

The effects of monetary policy depend significantly on the capacity of the Central Bank to affect market interest rates by managing liquidity. Therefore, it comes out as an important issue to determine the degree of flexibility of lending and deposit rates to changes in policy rates. In this sense, there is a vast literature that explores sluggishness on bank interest rates. In terms of deposit interest rates a larger rigidity has been associated to higher levels of concentration on the banking industry. Besides, the market discipline hypothesis would imply differences on the response of banks’ deposit rates according to their characteristics. This paper analyzes deposit interest rate sluggishness for the Chilean banking industry and its relation with market concentration and bank characteristics. The results support the fact that higher concentration imply more rigidity and that bank characteristics such as solvency, size and loan risk would also make a difference in the speed of adjustment.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 311.

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Date of creation: Mar 2005
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Handle: RePEc:chb:bcchwp:311

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  1. Solange Berstein & J. Rodrigo Fuentes, 2004. "Is There Lendign Rate Stickiness in the Chilean Banking Industry?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 6, pages 183-210 Central Bank of Chile.
  2. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  3. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
  4. Arellano, M., 1989. "A Note On The Anderson-Hsiao Estimator For Panel Data," Economics Series Working Papers 9975, University of Oxford, Department of Economics.
  5. Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through," IMF Working Papers 03/112, International Monetary Fund.
  6. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  7. Scholnick, Barry, 1996. "Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 485-496, June.
  8. Alvarez, J. & Arellano, M., 1998. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Papers 9808, Centro de Estudios Monetarios Y Financieros-.
  9. Diebold, Francis X & Sharpe, Steven A, 1990. "Post-deregulation Bank-Deposit-Rate Pricing: The Multivariate Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 281-91, July.
  10. Heffernan, Shelagh A, 1997. "Modelling British Interest Rate Adjustment: An Error Correction Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 211-31, May.
  11. David Neumark & Steven A. Sharpe, 1989. "Market structure and the nature of price rigidity: evidence from the market for consumer deposits," Finance and Economics Discussion Series 52, Board of Governors of the Federal Reserve System (U.S.).
  12. Paul Mizen & Boris Hofmann, 2002. "Base rate pass-through: evidence from banks' and building societies' retail rates," Bank of England working papers 170, Bank of England.
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Cited by:
  1. Pierre-Richard Agénor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 120, Economics, The Univeristy of Manchester.
  2. Kauko , Karlo, 2005. "Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data," Research Discussion Papers 9/2005, Bank of Finland.
  3. J. Rodrigo Fuentes & Verónica Mies, 2007. "Changes in Monetary Policy Conduct and Their Effects on Banking Spreads," Working Papers Central Bank of Chile 428, Central Bank of Chile.
  4. Georgios E. Chortareas & Claudia Girardone & Jesus Gustavo Garza-Garcia, 2010. "Banking Sector Performance in Some Latin American Countries: Market Power versus Efficiency," Working Papers 2010-20, Banco de México.
  5. Carlos Andrés Amaya G., 2005. "Interest Rate Setting And The Colombian Monetary Transmission Mechanism," BORRADORES DE ECONOMIA 002910, BANCO DE LA REPÚBLICA.

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