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Monetary transmission models for bank interest rates

Author

Listed:
  • Laura Parisi

    (Department of Economics and Management, University of Pavia)

  • Igor Gianfrancesco

    (Banco di Desio e della Brianza, Risk Management Division)

  • Camillo Gilberto

    (Banca Monte dei Paschi di Siena)

  • Paolo Giudici

    (Department of Economics and Management, University of Pavia)

Abstract

Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterised by very low monetary rates. The current state of close-to-zero interest rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows to compare it with the error correction model. We also contribute to the literature on interest rate risk modelling proposing a forward looking method to allocate on-demand deposits to non-zero time maturity bands, according to the predicted bank rates.

Suggested Citation

  • Laura Parisi & Igor Gianfrancesco & Camillo Gilberto & Paolo Giudici, 2015. "Monetary transmission models for bank interest rates," DEM Working Papers Series 101, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0101
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0101.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Paolo Giudici & Laura Parisi, 2015. "Dynamic models for monetary transmission," DEM Working Papers Series 106, University of Pavia, Department of Economics and Management.

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    More about this item

    Keywords

    Error Correction Model; Forecasting Bank Rates; Monte Carlo predictions; Interest Rate Risk models;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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