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Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products

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  • Tomas Havranek

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic
    Czech National Bank)

  • Zuzana Irsova
  • Jitka Lesanovska

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)

Abstract

An important component of monetary policy transmission is the pass-through from financial market interest rates, directly influenced or targeted by central banks, to the rates that banks charge firms and households. Yet the available evidence on the strength and speed of the pass-through is mixed and varies across countries, time periods, and even individual banks. We examine the pass-through mechanism using a unique data set of Czech loan and deposit products and focus on bank-level determinants of pricing policies, especially cost efficiency, which we estimate employing both stochastic frontier and data envelopment analysis. Our main results are threefold: First, the long-term pass-through was close to complete for most products before the financial crisis, but has weakened considerably afterward. Second, banks that provide high rates for deposits usually charge high loan markups. Third, cost-efficient banks tend to delay responses to changes in the market rate, smoothing loan rates for their clie nts.

Suggested Citation

  • Tomas Havranek & Zuzana Irsova & Jitka Lesanovska, 2015. "Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products," Working Papers IES 2015/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2015.
  • Handle: RePEc:fau:wpaper:wp2015_24
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    More about this item

    Keywords

    Monetary transmission; cost efficiency; bank pricing policies; stochastic frontier analysis; data envelopment analysis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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