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Interest rate deregulation: Monetary policy efficacy and rate rigidity

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  • Chong, Beng Soon

Abstract

This paper examines the effects of interest rate regulation, and subsequent deregulation, on the efficacy of monetary policy and rigidity of retail bank deposit rates in Hong Kong. Using an error-correction model, we find that interest rate deregulation increases the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long-term pass-through for retail bank deposit rates. Our study also shows that the adjustments in retail bank deposit rates are asymmetric and rigid upwards during the regulated period, but tend to be rigid downwards during the deregulated period. The spreads between retail bank deposit rates and market rates have also tightened sharply after the removal of interest rate controls.

Suggested Citation

  • Chong, Beng Soon, 2010. "Interest rate deregulation: Monetary policy efficacy and rate rigidity," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1299-1307, June.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1299-1307
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    14. John K. Ashton & Andros Gregoriou, 2014. "The Influence of Banking Centralization on Depositors: Regional Heterogeneities in the Transmission of Monetary Policy," Regional Studies, Taylor & Francis Journals, vol. 48(9), pages 1467-1482, September.
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    22. Xuejun Jin & Frank M. Song & Yizhong Wang & Yi Zhong, 2014. "Interest Rate Pass-through in a Dual-track System: Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 22(4), pages 21-39, July.

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