What Goes Up Must Come Down? Asymmetries and Persistence in Bank Deposit Rates

Posted: 8 Mar 2003

See all articles by Richard J. Rosen

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Abstract

This paper contains a model of price setting in the presence of heterogeneous customers, explaining why bank interest rates respond sluggishly to some extended movements in market interest rates but not to others. Price (the bank interest rate) is likely to change only slightly with cost (the market interest rate) when the price-cost margin is already large and to be responsive when the price-cost margin is relatively small. The model is tested using data on interest rates offered for bank deposit instruments during 1987-2001. The results support the theoretical model, indicating that customer behavior plays a role in bank interest rate decisions.

Keywords: Banks, interest rates, bank deposits

Suggested Citation

Rosen, Richard J., What Goes Up Must Come Down? Asymmetries and Persistence in Bank Deposit Rates. Available at SSRN: https://ssrn.com/abstract=382841

Richard J. Rosen (Contact Author)

Federal Reserve Bank of Chicago - Economic Research ( email )

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