IDEAS home Printed from https://ideas.repec.org/p/chb/bcchwp/762.html
   My bibliography  Save this paper

Bank's Price Setting and Lending Maturity: Evidence from an Inflation- Targeting Economy

Author

Listed:
  • Emiliano Luttini
  • Michael Pedersen

Abstract

Acknowledging that pass-through of the policy interest rate may be different amongst the private banks, this paper presents evidence of monetary pass-through conditional on different banks characteristics. A simple theoretical model is used to argue that the inflation rate also has to be taken into account when analyzing monetary pass-through. The focus is on nominal and real interest rates for commercial and consumer loans with different payback horizons. Taking a closer look at the construction of the interest rate data available, it becomes clear that short-term consumption rates are quite rigid and, thus, by construction react less to changes in the policy rate. Evidence from panel estimations with Chilean data for the period 2008 to 2014 suggests that short-term commercial rates react quite fast to changes in the monetary policy rate, while those at long-term seem to react more to inflation. Particularly size and deposit strength affect banks when fixing nominal commercial rates, while the determination of rates of consumer loans is particularly influenced by bank size and capital strength. With respect to real interest rates, commercial loans are affected by deposit strength, noninterest income and external obligations, while mortgages are affected by liquidity strength and provisions. The evidence provided in the present study reveals that the degree to which different bank characteristics affect pass-through of changes in the monetary policy rate and inflation depends to a great extent on the horizons of the loans.

Suggested Citation

  • Emiliano Luttini & Michael Pedersen, 2015. "Bank's Price Setting and Lending Maturity: Evidence from an Inflation- Targeting Economy," Working Papers Central Bank of Chile 762, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:762
    as

    Download full text from publisher

    File URL: http://si2.bcentral.cl/public/pdf/documentos-trabajo/pdf/dtbc762.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
    2. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2014. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment," American Economic Review, American Economic Association, vol. 104(1), pages 323-337, January.
    3. Gambacorta, Leonardo, 2005. "Inside the bank lending channel," European Economic Review, Elsevier, vol. 49(7), pages 1737-1759, October.
    4. Matousek, Roman & Sarantis, Nicholas, 2009. "The bank lending channel and monetary transmission in Central and Eastern European countries," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 321-334, June.
    5. Cumby, Robert E & Huizinga, John, 1992. "Testing the Autocorrelation Structure of Disturbances in Ordinary Least Squares and Instrumental Variables Regressions," Econometrica, Econometric Society, vol. 60(1), pages 185-195, January.
    6. Rodrigo Alfaro & Carlos García & Alejandro Jara & Helmut Franken, 2005. "The bank lending channel in Chile," BIS Papers chapters,in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 128-45 Bank for International Settlements.
    7. Leonardo Gambacorta & David Marques‐Ibanez, 2011. "The bank lending channel: lessons from the crisis," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 135-182, April.
    8. Jonathan H. Wright, 2011. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset," American Economic Review, American Economic Association, vol. 101(4), pages 1514-1534, June.
    9. Wu, Ji & Luca, Alina C. & Jeon, Bang Nam, 2011. "Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1128-1156, October.
    10. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    11. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, November.
    12. De Graeve, Ferre & De Jonghe, Olivier & Vennet, Rudi Vander, 2007. "Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 259-278, January.
    13. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    14. Altunbas, Yener & Fazylov, Otabek & Molyneux, Philip, 2002. "Evidence on the bank lending channel in Europe," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2093-2110, November.
    15. Horváth, Roman & Podpiera, Anca, 2012. "Heterogeneity in bank pricing policies: The Czech evidence," Economic Systems, Elsevier, vol. 36(1), pages 87-108.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Pedersen, 2016. "Pass-Through, Expectations, and Risks. What Affects Chilean Banks’ Interest Rates?," Working Papers Central Bank of Chile 780, Central Bank of Chile.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:762. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda). General contact details of provider: http://edirc.repec.org/data/bccgvcl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.