Modeling the whole firm: the effect of multiple inputs and financial intermediation on bank deposit rates
AbstractEmpirical studies of price competition typically analyze the direct effects of market structure, cost, and local demand on prices; this approach has been applied widely to studies of bank deposit rates. However, the theory of the banking firm suggests that substitutability between sources of deposits and conditions in the bank loan market should also affect the pricing of retail deposits. This paper develops a theoretical model to incorporate these effects, and tests the predictions empirically using institution-level deposit rate data from Bank Rate Monitor. The results suggest that the cost of large-scale deposits affects how banks price retail deposits, and that conditions in lending markets feed back into retail deposit rates.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2004-07.
Date of creation: 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
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