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Working Paper

Bank Deposit Rate Clustering: Theory and Empirical Evidence

The market prices of stocks and other assets tend to cluster on round fractions. A similar clustering is found in the interest rates paid on retail bank deposits. However, the theoretical rationales given for asset-price clustering are incompatible with the clustering of retail deposit rates. This paper proposes a theory based on depositors? limited recall. It shows that when banks exploit this phenomenon, deposit rates will tend to be set at round fractions and will be relatively "sticky" at these levels. The implications of this theoretical model are tested using money market deposit account and retail certificate of deposit interest-rate data from a sample of more than 500 banks.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Kahn, Charles, George Pennacchi, and Ben Sopranzetti. 1996. “Bank Deposit Rate Clustering: Theory and Empirical Evidence.” Federal Reserve Bank of Cleveland, Working Paper No. 96-04.