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Asymmetric adjustments in the spread of lending and deposit rates: Evidence from extended threshold unit root tests

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  • Lee, Junsoo
  • Strazicich, Mark C.
  • Yu, Byung Chul

Abstract

In this paper, we test for asymmetric adjustments in the spread of the U.S. prime lending rate and 3-month certificate of deposit rate. In doing so, we extend the pioneering threshold unit root tests of Enders and Granger (1998) to more flexible models where the deterministic terms and short-run dynamics, in addition to the persistent parameters, can differ in two regimes. While some previous works have tested for asymmetric adjustments in the spread of lending and deposit rates using threshold unit root tests, the deterministic terms and short-run dynamics were assumed to be symmetric, which can lead to bias and less accurate conclusions if these conditions do not hold. Overall, we find that the spread in lending and deposit rates is stationary but adjustment to the equilibrium is asymmetric. In particular, we find more rapid adjustment when the spread is narrowing below a threshold level than when widening above this level. Several theoretical implications are suggested.

Suggested Citation

  • Lee, Junsoo & Strazicich, Mark C. & Yu, Byung Chul, 2013. "Asymmetric adjustments in the spread of lending and deposit rates: Evidence from extended threshold unit root tests," Review of Financial Economics, Elsevier, vol. 22(4), pages 187-193.
    • Handle: RePEc:eee:revfin:v:22:y:2013:i:4:p:187-193
    DOI: 10.1016/j.rfe.2013.08.002
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    References listed on IDEAS

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    1. 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.
    2. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-176, April.
    3. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 657-680.
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    5. Rhee, Wooheon & Rich, Robert W., 1995. "Inflation and the asymmetric effects of money on output fluctuations," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 683-702.
    6. James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1261-1282.
    7. 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 938-945, September.
    8. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    9. Karras, Georgios, 1996. "Are the Output Effects of Monetary Policy Asymmetric? Evidence from a Sample of European Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 267-278, May.
    10. Thompson, Mark A., 2006. "Asymmetric adjustment in the prime lending-deposit rate spread," Review of Financial Economics, Elsevier, vol. 15(4), pages 323-329.
    11. Bruinshoofd, Allard & Candelon, Bertrand, 2005. "Nonlinear monetary policy in Europe: fact or myth?," Economics Letters, Elsevier, vol. 86(3), pages 399-403, March.
    12. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
    13. Chu Nguyen & Anisul Islam, 2010. "Asymmetries in the Thai lending-deposit rate spread: an econometric analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 17(13), pages 1229-1236.
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    Cited by:

    1. Helen Louri & Petros M. Migiakis, 2019. "Bank lending margins in the euro area: Funding conditions, fragmentation and ECB's policies," Review of Financial Economics, John Wiley & Sons, vol. 37(4), pages 482-505, October.

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    More about this item

    Keywords

    Asymmetric effects; Threshold models; Unit root tests; Interest rates;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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