The Duration of Bank Retail Interest Rates

51 Pages Posted: 24 Apr 2010 Last revised: 12 Dec 2011

See all articles by Ben R. Craig

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Valeriya Dinger

Universität Osnabrück

Date Written: December 5, 2011

Abstract

We use bank retail interest rates as price examples in a study of the determinants of price durations. The extraordinary richness of the data allows us to address some major open issues from the price rigidity literature, such as the functional form of the hazard of changing a price, the effect of firm and market characteristics on the duration of prices, and asymmetry in the speed of adjustments to positive and negative cost shocks. We find that the probability of a bank changing its retail rate initially (that is, in roughly the first six months of a spell) increases with time. The most important determinants of the duration of retail interest rates are the cumulated change in the money market interest rates and the policy rate since the last retail rate change. Among bank and market characteristics, the size of the bank, its market share in a given local market, and its geographical scope significantly modify retail rate durations. Retail rates adjust asymmetrically to positive and negative wholesale interest rate changes; the asymmetry of the adjustment is reinforced in part by the bank’s market share. This suggests that monopolistic distortions play a vital role in explaining asymmetric price adjustments.v[Note: this paper was originally titled: “A Microeconometric Investigation into Bank Interest Rate Rigidity.”]

Keywords: interest rate rigidity, interest rate pass-through, duration analysis, hazard rate

JEL Classification: E43, E44, G21

Suggested Citation

Craig, Ben R. and Dinger, Valeriya, The Duration of Bank Retail Interest Rates (December 5, 2011). FRB of Cleveland Working Paper No. 10-01R, Available at SSRN: https://ssrn.com/abstract=1595073

Ben R. Craig (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

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