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Dynamic lag structure of deposits and loans interest rates and business cycles formation

Author

Listed:
  • Bijan Bidabad
  • Abul Hassan

Abstract

Purpose - This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach - The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings - The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications - The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications - The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value - Regarding the applied method, the topic is new.

Suggested Citation

  • Bijan Bidabad & Abul Hassan, 2017. "Dynamic lag structure of deposits and loans interest rates and business cycles formation," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 25(2), pages 114-132, May.
  • Handle: RePEc:eme:jfrcpp:jfrc-09-2016-0078
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    Keywords

    Business cycle; Banking sector; Macroeconomics; Interest rate; Banking crisis; Lag structure; E32; E43; G01;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises

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