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How do anticipated changes to short-term market rates influence banks' retail interest rates? Evidence from the four major euro area economies

  • Banerjee, A.
  • Bystrov, V.
  • Mizen, P.

In this paper we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates - a level, slope, curvature model and a principal components model - before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.

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Paper provided by Banque de France in its series Working papers with number 361.

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Length: 73 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:361
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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