Interest Rate Transmission in the UK: A Comparative Analysis Across Financial Firms and Products

International Journal of Finance & Economics 14(1), pp 45-63, 2009

31 Pages Posted: 19 May 2006 Last revised: 8 Sep 2012

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Shelagh Heffernan

City University London - Sir John Cass Business School

Date Written: 2006

Abstract

This paper differentiates itself from the existing literature by testing for heterogeneities in the interest rate transmission mechanism using a large sample of 662 monthly retail rate histories (1993-2004) on seven key deposit and loan products. Error correction models are estimated to analyze long run pass-through, long-run mark up and the short run speed of adjustment. The prediction that the official and retail rates move together in the long run is supported by the data. The evidence suggests weak between-product heterogeneity but notable differences were found between financial firms in the way they adjust their rates which could hinder the achievement of monetary policy objectives. Consumer responses to official rate changes could therefore be more phased and intricate than hitherto believed. Heterogeneity in adjustment is found to be linked to menu costs and key financial ratios under managerial control.

Keywords: Error correction model, Long run equilibrium rate, Adjustment speed, Mark up, Pass through, Heterogeneity, Menu costs

JEL Classification: G20, G21, E43, E52

Suggested Citation

Fuertes, Ana-Maria and Heffernan, Shelagh A., Interest Rate Transmission in the UK: A Comparative Analysis Across Financial Firms and Products (2006). International Journal of Finance & Economics 14(1), pp 45-63, 2009, Available at SSRN: https://ssrn.com/abstract=903348 or http://dx.doi.org/10.2139/ssrn.903348

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Shelagh A. Heffernan

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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