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Working Paper

A Microeconometric Investigation into Bank Interest Rate Rigidity

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.
03.18.2010ISSN 2573-7953 WP 10-01Revisions WP 10-01RDOI 10.26509/frbc-wp-201001
Keywords price stickiness, interest rate pass-through, duration analysis, hazard rate
JEL Classification Codes E43, E44, G21

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.

*This paper was originally published in March 2010 with the title “A Microeconometric Investigation into Bank Interest Rate Rigidity.”

Suggested Citation

Craig, Ben R., and Valeriya Dinger. 2010. “A Microeconometric Investigation into Bank Interest Rate Rigidity.” Federal Reserve Bank of Cleveland, Working Paper No. 10-01. https://doi.org/10.26509/frbc-wp-201001