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The Lending-Deposit Rate Relationship in Eastern European Countries: Evidence from the Rank Test for Non-linear Cointegration

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Abstract

This study carries out an examination of the potential non-linear cointegration between the lending and deposit rates of eight Eastern European countries using the non-parametric rank tests proposed by Breitung (2001). Based upon our adoption in this study of the threshold error-correction model (TECM), we find solid evidence of an asymmetric price transmission effect, in both the short term and the long term, between lending and deposit rates. Thus, our results reveal that there are indeed such long-run non-linear cointegration relationships between the lending and deposit rates in these Eastern European countries. Furthermore, we go on to successfully capture the dynamic adjustment of the spread.

Suggested Citation

  • Hsu-Ling Chang & Chi-Wei Su, 2010. "The Lending-Deposit Rate Relationship in Eastern European Countries: Evidence from the Rank Test for Non-linear Cointegration," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 534-544, December.
  • Handle: RePEc:fau:fauart:v:60:y:2010:i:6:p:534-544
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    File URL: http://journal.fsv.cuni.cz/storage/1200_str_534_544_-_su.pdf
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    1. Ewing, Bradley T & Payne, James E & Forbes, Shawn M, 1998. "Co-movements of the Prime Rate, CD Rate, and the S&P Financial Stock Index," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, pages 469-482.
    2. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics.
    3. 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.
    4. Sargan, J D & Bhargava, Alok, 1983. "Maximum Likelihood Estimation of Regression Models with First Order Moving Average Errors When the Root Lies on the Unit Circle," Econometrica, Econometric Society, vol. 51(3), pages 799-820, May.
    5. Diebold, Francis X & Sharpe, Steven A, 1990. "Post-deregulation Bank-Deposit-Rate Pricing: The Multivariate Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 281-291, July.
    6. Walter Enders & Selahattin Dibooglu, 2001. "Long-Run Purchasing Power Parity with Asymmetric Adjustment," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 433-445, October.
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    1. repec:taf:applec:v:50:y:2018:i:5:p:559-573 is not listed on IDEAS

    More about this item

    Keywords

    lending-deposit rates; rank test; non-linearity;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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