a perspective on the symptoms and causes of the financial crisis abstract prior to the 2007 2008 financial crisis banking sector profits were very high but the profitability of financial intermediation was poor using a novel model of banking this article argues that the high profits were achieved through balance sheet expansion and growing default liquidity and term risk mismatches between assets and liabilities as a result large banks financial leverage rose as they became less liquid setting the conditions for a systemic banking crisis this article argues that the increase in financial leverage was possible due to misguided changes in the regulatory framework specifically the basel i capital accord and reductions in reserve requirements finally this article overviews and assesses the policy response in the aftermath of the crisis

rockets and feathers understanding asymmetric pricing prices rise like rockets but fall like feathers this stylized fact of most markets is con rmed by many empirical studies in this paper i develop a model with competitive rms and rational partially informed consumers where such asymmetric response to costs by rms emerges naturally in contrast to public opinion and past work collusion is not necessary to explain such result using a rich dataset of retail gasoline prices i nd the observed price dispersion pattern to be consistent with the model s prediction

interest rate deregulation monetary policy efficacy and rate rigidity abstract this paper examines the effects of interest rate regulation and subsequent deregulation on the efficacy of monetary policy and rigidity of retail bank deposit rates in hong kong using an error correction model we find that interest rate deregulation increases the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long term pass through for retail bank deposit rates our study also shows that the adjustments in retail bank deposit rates are asymmetric and rigid upwards during the regulated period but tend to be rigid downwards during the deregulated period the spreads between retail bank deposit rates and market rates have also tightened sharply after the removal of interest rate controls

bank consolidation and the dynamics of consumer loan interest rates this paper analyzes interest rates quoted by individual banks for personal and automobile loans in 10 cities personal loan rates are higher in concentrated markets and banks involved in mergers reduce personal rates relative to their competitors prior to the merger s completion this is consistent with mergers changing the size structure of personal loan markets and merger participants desire to gain regulatory approval auto rates are unaffected by local concentration and mergers suggesting that their market is nationwide rates for both loan types respond asymmetrically to changes in treasury rates being more sensitive to a rise than a fall

asymmetric price adjustments a supply side approach using a model of dynamic price competition we provide an explanation from the supply side for the well established observation that output prices react faster in response to input cost increases than to decreases when costs decline the opportunity of profitable storing in anticipation of higher future costs allows competitive firms to coordinate on prices above current marginal costs the initial price response is only partial and profitable storing relaxes competition conversely when costs rise storing is not beneficial in anticipation of lower future costs and firms immediately adjust their prices to current marginal costs which entails the standard bertrand outcome our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle

acquisition targets and motives in the banking industry this paper uses a large sample of individual banking organizations observed from 1996 to 2005 to investigate the characteristics that made them more likely to be acquired we use a definition of acquisition that we consider preferable to that used in much of the previous literature and we employ a competing risk hazard model that reveals important differences that depend on the type of acquirer since interstate acquisitions became more numerous during this period we also investigate differences in the determinants of acquisition between in state and out of state acquirers we also employ a subsample of publicly traded banking organizations to investigate the role of managerial ownership in explaining the likelihood of acquisition the hypothesis that acquisitions serve to transfer resources from less efficient to more efficient uses receives substantial support from our results as do a number of other relevant hypotheses

when does the prime rate change abstract we study the frequency of prime rate changes we model the prime rate as a time series variable that can be changed only at some cost this yields a logit model in which the probability of a prime rate change is a function of market variables we test this model using data from a micro data set that gives the dating of prime rate changes the results indicate that adjustment costs are important to the prime rate adjustment process and that changes in exogenous variables have a significantly larger effect on the probability of a prime rate increase than decrease

a test of the law of one price in retail banking this paper investigates the level and the determinants of retail banking interest rate differences among spanish banks in the period 1989 2003 we find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long term values in response to external shocks as the relative version of the law of one price predicts but the evidence runs contrary to the absolute version of the law credit risk premium part of the marginal cost of the loans granted by a particular bank is an important source of interest rate dispersion across banks and loan products both before and after spain joined the euro zone therefore differences in credit risk policies across banks must be taken into account when forming expectations about european retail banking integration

search with learning understanding asymmetric price adjustments in many retail markets prices rise faster than they fall we develop a model of search with learning to explain this phenomenon of asymmetric price adjustments by extending our static game analysis to the dynamic setting we demonstrate that asymmetric price adjustments arise naturally when a positive cost shock occurs all the searchers immediately learn the true state the search intensity and hence the prices fully adjust in the next period when a negative cost shock occurs it takes longer for nonsearchers to learn the true state and the search intensity increases gradually leading to slow falling of prices

measuring rents and interest rate risk in imperfect financial markets the case of retail bank deposits traditional measures of interest rate risk assume that prices of financial assets and liabilities are set in perfectly competitive markets however evidence suggests that many retail financial markets do not follow the competitive paradigm in this paper we employ a general contingent claims framework to value rents earned by banks in demandable retail deposit markets our analysis provides a natural and economically meaningful measure of interest rate risk for these imperfectly competitive markets using monthly survey data on now accounts and mmdas we estimate the value of retail deposit rents and deposit durations for more than 200 commercial banks

oil shocks and subnational public investment the role of institutions in regional resource curse abstract theoretical and empirical studies on oil price shocks have mainly focused on measuring its relationship with national macroeconomic performance in developing countries nevertheless research is scarce on the effects of natural resource booms on local governments and even more on public investment using a difference in differences strategy this paper contributes to identifying the causal effects of the recent oil boom in colombia 2008 2016 on subnational public investment our results suggest that the rise in international oil prices had mostly positive and disproportionate effects on public investment in oil producing departments and municipalities although municipalities and departments prioritized different sectors both increased their investments in sectors with high social returns suggesting a lower likelihood of a resource curse we also found that an institutional reform in 2012 was a source of heterogeneity and the main driver of the causal effects on subnational public investments

asymmetric quantile analysis of the swedish mortgage price discovery process based on swedish banking data we discover robust and significantly positive asymmetric price transmission apt effects over all analysed regression quantiles of our mortgage interest rates with even larger positive apt for the higher percentiles the analysis was enabled through unique access to a swedish bank s seb own records of their true borrowing costs our central contribution is that there is a higher propensity for the bank to rapidly increase its mortgage interest rates for customers following an increase in its borrowing costs compared with the propensity for the bank to decrease its customers mortgage rates subsequent to a corresponding borrowing cost decrease

what s different among banks abstract based on commercial paper being a nearly perfect substitute for certificates of deposits cds and cd reserve requirements creating a higher cost of funds for banks fama shows that the banking industry must have some monopoly power relative to other financial institutions his analysis does not resolve whether this monopoly power is vested in banks collectively vis a vis other financial institutions or if the monopoly power extends to the level of individual banks using an event study framework to examine the elimination of a reserve requirement we find significant evidence of monopoly power at the level of individual banks

what causes rockets and feathers an experimental investigation prices usually adjust much faster when costs increase than when costs decrease in spite of the many empirical studies confirming this rockets and feathers phenomenon for different industries the mechanism driving it is not well understood we use simple experimental markets with and without search frictions and either privately or publicly observed cost shocks to study how sensitive the rockets and feathers phenomenon is to changes in search costs and information conditions in contrast to standard theoretical predictions we observe price dispersion and spontaneous asymmetric price adjustments in all treatments neither search costs nor private information on cost shocks are indispensable for prices to adjust asymmetrically in the short term the initial asymmetry quickly disappears if the direction of the cost shocks are publicly known while it persists in both treatments with private information

risk premium and market power in credit markets abstract the use of credit risk adjusted marginal opportunity cost of funds in the computation of the lerner index for bank loans opens new directions to properly evaluate market power of banks in credit markets beyond disputed concentration measures

a note on the risk adjusted price concentration relationship in banking abstract price concentration studies in banking typically find a significant and negative relationship between consumer deposit rates i e prices and market concentration this implies highly concentrated banking markets are bad for depositors it also provides support for the structure conduct performance hypothesis and rejects the efficient structure hypothesis however these studies have focused almost exclusively on supply side control variables and neglected demand side variables when estimating the reduced form price concentration relationship for example previous studies have not included in their analysis bank specific risk variables as measures of cross sectional derived deposit demand we find that when bank specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 we offer an explanation for these results based on the correlation between a bank s risk profile and the structure of the market in which it operates these results suggest that it may be necessary to reconsider the well established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks this has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies and in a more general sense these results suggest that any structure conduct performance based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables and thus the results from those studies may be spurious

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

an asymmetry generator for error coorection mechanisms with application to bank mortgage rate dynamics empirical evidence supports asymmetries in the adjustment of prices interest rates and other economic variables the asymmetry hypothesis however is often procedurally difficult to set up and test this article shows that a wide variety of such mechanisms can be nested within an asymmetry generator which represents the interactions between the disequilibrium term of an error correction mechanism and an ancillary driver process the asymmetry hypothesis can then be tested in a straightforward extension of linear statistical methods the methods are applied to 10 years of monthly new zealand mortgage rate data

retail gasoline price dynamics and local market power using monthly data from the 48 contiguous states except nevada for the 1988 2002 period it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases moreover markets with high average retail wholesale margins experience a slower adjustment and a more asymmetric response since gasoline is the only variable input average margins in a state likely reflect the degree of retail market power this suggests that sticky prices and response asymmetries in the gasoline market are at least partially a consequence of retail market power

deposit spreads and the welfare cost of inflation abstract high nominal interest rates are associated with high deposit spreads which is consistent with a model where banks have monopoly power and currency and deposits are substitutes therefore higher interest rates raise the implicit price of banking services increase bank profits and attract entry into the banking sector taking these effects into account a one percentage point increase in inflation has a welfare cost of 0 083 of gdp 6 7 times higher than traditional estimates

competition in banking and the lending channel evidence from bank level data in asia and latin america abstract this paper examines how banking competition affects the transmission of monetary policy through the bank lending channel we apply a two step estimation procedure using bank level panel data for commercial banks in 10 asian and 10 latin american countries during the period from 1996 to 2006 in the first step we measure the degree of banking competition by applying the methodology proposed by panzar and rosse 1987 in the second step we estimate a loan growth equation where the explanatory variables include the panzar rosse measure of banking competition the estimation results provide consistent evidence that increased competition in the banking sector weakens the transmission of monetary policy through the bank lending channel this is especially true for banks in latin american countries and banks of small size low liquidity and low capitalization we also discuss the policy implications of the main findings of this paper

capital market consequences of asymmetric output price rigidities abstract firms adjust output prices to cost decreases with a delay relative to cost increases i document firms operating income becomes less persistent when their input costs decrease than when their costs increase the stocks of firms slowly cutting output prices due to asymmetric output price rigidities also experience high stock return volatility and their ceos more frequently manage expectations of financial analysts i show these results are consistent with a new keynesian model with trend inflation

business cycles and monetary regimes in emerging economies a role for a monopolistic banking sector abstract this study shows that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle strategic limit pricing aimed at protecting retail niches from potential competitors generates countercyclical bank markups markup increments during recessions directly increase borrowing costs for firms and indirectly damage the financial position of firms balance sheets increasing the risk perception of lenders i use bayesian techniques and data from argentina to show that the inclusion of monopolistic banking improves the fit of the new keynesian small open economy model

retail interest rate rigidity after financial liberalization the argument for financial liberalization in developing countries is broadly that administered retail lending and deposit interest rates set below their market clearing levels result in the misallocation of credit and thus retard investment and growth see fry 1994 the usual policy prescription in the development literature is therefore to allow commercial banks to determine their own retail interest rates the fact that the commercial banks have this freedom does not of course imply that retail rates will be market clearing commercial banks may be sluggish when adjusting their retail rates implying that the misallocation of credit may remain a problem even after liberalization furthermore sluggish retail interest rate adjustment will increase the lags involved in the transmission of monetary policy this is clearly an important issue yet it has received very little attention in the financial liberalization literature one possible reason for this lack of attention is that much of the literature on price rigidity in the banking system utilizes microeconomic crosssectional data sets data of a type that is useful for examining issues of market concentration in different geographical markets see gilbert 1984 this type of data is typically unavailable for developing econornies this paper introduces a different approach using only the time series data that are available the issue of rigidity is examined using the cointegration and error correction methodology utilizing results on speeds of adjustment of retail lending and deposit rates to changes in wholesale interbank rates a further innovation in the paper is the use of an asymmetric error correction methodology which makes it possible to examine whether retail rates have greater rigidity upwards or downwards

market structure and the pass through of the federal funds rate abstract we study the effect of local market bank concentration on business loan originations and on the pass through of the federal funds rate to business loan originations economic theory on the relationship between concentration and the pass through of input prices to quantity or price is ambiguous we find that more concentrated markets have lower business loan originations and experience smaller changes in business loan originations in response to changes in the federal funds rate our results support the idea that market concentration dampens quantity reactions to input price changes

inflation dynamics and the cost channel of monetary transmission evidence from vector autoregressions indicates that the impact of interest rate shocks on macroeconomic aggregates can substantially be affected by the so called cost channel of monetary transmission in this paper we apply a structural approach to examine the relevance of the cost channel for inflation dynamics in g7 countries we augment the so called hybrid new keynesian philips curve by letting firms costs for external funds rise with the short run nominal interest rate our estimates reveal that the magnitude of this cost channel strongly varies between countries including member countries of the emu in accordance with differences in their financial systems simulations of a new keynesian model further show that the presence of the cost channel substantially affects the transmission of monetary policy shocks in particular the inflation response

monetary transmission mechanism in central and eastern europe surveying the surveyable this paper surveys recent advances in empirical studies of the monetary transmission mechanism mtm with special attention to central and eastern europe cee our results indicate that the strength of the exchange rate pass through substantially declined over time mainly due to a fall in inflation rates and to some extent due to the so called composition effect the asset price channel is weak and is likely to remain weak because of shallow stock and private bond markets and because of low stock and bond holdings of domestic household house prices may become an exception with higher levels mortgage lending and with high owner occupancy ratios while the credit channel could be a powerful channel of monetary transmission as new funds raised on capital markets are close to zero in cee it is actually not as both commercial banks and non financial corporations can escape domestic monetary conditions by borrowing from their foreign mother companies the moderately good news is however that those banks and firms are influenced by monetary policy in the euro area because their parent institutions are themselves subjected to the credit channel in the euro area

on reputation a microfoundation of contract enforcement and price rigidity we study the impact of reputational incentives in markets characterised by moral hazard problems social preferences have been shown to enhance contract enforcement in these markets while at the same time generating considerable wage and price rigidity reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially this effect is however associated with a considerable bilateralisation of market interactions suggesting that it may aggravate price rigidities surprisingly reputation in fact weakens the wage and price rigidities arising from social preferences thus in markets characterised by moral hazard reputational incentives unambiguously increase mutually beneficial exchanges reduce rents and render markets more responsive to supply and demand shocks

asymmetric adjustment of commercial bank interest rates evidence from malaysia and singapore abstract this paper examines the rigidity of commercial bank interest rates using evidence from singapore and malaysia an asymmetric error correction technique is used to test whether mean adjustment lags are different when retail rates are above or below their equilibrium levels it is concluded in both countries that the mean adjustment lag is shorter when the deposit rate is above its equilibrium than when it is below its equilibrium using the framework of hannan and berger 1991 this finding implies that the hypothesis of collusion cannot be rejected

prices for cash and cash for prices theory and evidence on convenient pricing a transaction between a seller and a buyer incurs a payment cost the payment cost is borne by the seller depending on the payment instrument the buyer chooses cash or card card payment is more costly than cash payment so the seller prefers that the buyer pays cash in this article we study the strategy of the seller setting a convenient price which simplifies transactions and pushes the buyer to pay cash the theoretical analysis which models both the seller and the buyer in a game setting derives two propositions 1 the seller is more likely to set a more convenient price and 2 the buyer is more likely to pay cash a more convenient price the empirical analysis supports both propositions thus sellers adopt a convenience pricing strategy prices for cash and this strategy pushes buyers to pay cash cash for prices

competition transmission and bank pricing policies evidence from belgian loan and deposit markets abstract this paper addresses the pass through from market interest rates to retail bank interest rates the paper advocates a heterogeneous approach and applies it to the belgian banking market a substantial proportion of the heterogeneity in bank pricing policies can be explained by the bank lending channel and the relative market power hypothesis the results also suggest that the long term pass through is typically less than one for one rejecting the completeness hypothesis while there is no convincing evidence for asymmetry in retail rates large deviations from equilibrium mark ups are faster reduced than small deviations overall conditions for corporate loans are more competitive compared to consumer loans demand and savings deposits have by far the most rigid prices

the deposits channel of monetary policy we propose and test a new channel for the transmission of monetary policy we show that when the fed funds rate increases banks widen the interest spreads they charge on deposits and deposits ow out of the banking system we present a model in which imperfect competition among banks gives rise to these relationships an increase in the nominal interest rate increases banks market power inducing them to increase deposit spreads and hence restrict deposit supply households respond to the increase in deposit prices by substituting from deposits into less liquid but higheryielding assets consequently changes in the nominal interest rate aect banks cost of capital and lending using branch level data on the universe of u s banks we show that following an increase in the fed funds rate deposit spreads increase by more and supply falls more in areas with less deposit competition we control for changes in banks lending opportunities by comparing branches of the same bank we control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated our results imply that monetary policy has a signicant impact on how the nancial system is funded on the quantity of safe and liquid assets it produces and on its provision of loans to the real economy

bank asset quality monetary policy pass through the funding mix of european firms is weighted heavily towards bank credit which underscores the importance of efficient pass through of monetary policy actions to lending rates faced by firms euro area pass through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis distressed loan books are a crisis hangover with direct implications for profitability hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate this paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass through using bank level data over the period 2008 2014 we empirically test the implications of the model we show that a one percentage point increase in the impairment ratio lowering short run pass through by 3 we find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all

does organizational form impact pricing asymmetry evidence from nonprofit financial institutions why output prices tend to rise faster in response to input cost increases than they fall in response to input cost decreases is a hotly debated issue in modern economics in this article i contribute to this asymmetric pricing debate by expanding the domain of organizational forms where this question has been investigated more specifically previous research has focused on for profit firms i expand the investigation by focusing on nonprofit organizations credit unions are the nonprofit organization used in my analysis credit unions provide essentially identical types of consumer financial services and products as commercial banks but do so from a very different not for profit orientation however in this study i document similar asymmetric rate setting behavior by credit unions this suggests that pricing asymmetry is likely to be much more widespread as it relates to nonprofit institutions as well as those in the for profit sector

active intermediation in a monetary overlapping generations economy abstract this paper establishes that the profit seeking activities of private intermediaries can ensure pareto efficiency in the standard pure exchange monetary overlapping generations economy without the need for government monetary or fiscal policy intervention moreover these profit seeking activities are shown to rule out all aperiodic and k periodic cycles for k greater than 2 contrary to much recent work on intermediation the profit opportunities that arise for intermediaries in this context are not due to assumed frictions or asymmetric information rather they are due to the dynamic open ended structure of the economy which permits debt roll over

monetary policy transparency and pass through of retail interest rates abstract this paper examines the degree of pass through and adjustment speed of retail interest rates in response to changes in benchmark market rates in new zealand during the period 1994 2004 we consider the effects of policy transparency and financial structure of the monetary transmission mechanism new zealand is the first oecd country to adopt a full fledged inflation targeting regime with specific accountability and transparency provisions policy transparency was further enhanced by a shift from quantity settlement cash to price interest rate operating targets in 1999 using phillips loretan estimates of cointegrating regressions we find complete long term pass through for some but not all retail rates our results also show that the introduction of the official cash rate ocr increased the pass through of floating and deposit rates but not fixed mortgage rates in line with previous studies we find the immediate pass through of market interest rates to bank retail rates to be incomplete although we find no statistical evidence for asymmetric response of retail rates to changes in market rates other than for business lending rates in the pre ocr period differences in the magnitude of mean adjustment lags indicate that banks appear to pass on decreases to fixed mortgage rates faster overall our results confirm that monetary policy rate has more influence on short term interest rates and that increased transparency has lowered instrument volatility and enhanced the efficacy of policy

the relative rigidity of oligopoly pricing abstract evidence on canadian daily newspaper prices shows that unlike in rotemberg and saloner american economic review 1987 77 917 926 monopolies change prices more frequently than oligopolies

monetary transmission with multiple policy rates evidence from turkey abstractquantitative easing policies have led to persistent divergence between officially announced policy rates and short term money market rates in many economies making it challenging to assess

credit cronyism and control evidence from the americas abstract i examine the effects of corruption and government control of the banking system for 18 western hemisphere countries on the sensitivity of commercial lending rates to changes in international financial conditions and find that most countries lending rates are insensitive to these conditions only the least corrupt nations exhibit a significant positive relation between lending rates and international financial conditions the responsiveness of these lending rates is nonlinearly related to corruption and government control of the banking sector the findings suggest that both corruption and government control of banks need to be considered when analyzing international credit markets

the efficiency of the scandinavian banking sector a wavelet quantile regression analysis in this article the scandinavian housing financing market is analysed in order to determine whether the interest rate price discovery processes of denmark norway and sweden are efficient based o

fairly priced deposit insurance and bank charter policy the thrust of current deposit insurance reform risk based insurance premiums and capital requirements is an effort to price deposit insurance more fairly fairly pricing deposit insurance eliminates inequitable wealth transfers but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy results in an efflcient separating equilibrium this article analyzes the effect of alternative charter policies when deposit insurance is fairly priced the thrust of current deposit insurance reformrisk based capital requirements 1988 and risk based insurance premiums 1994 is an effort to price deposit insurance more fairly chan greenbaum and thakor s 1992 seminal paper dramatically illustrated that fairly pricing deposit insurance is not enough to solve the deposit insurance problem in their model when banks hold nontraded private information assets no equilibrium exists with fairly priced deposit insurance unless banks earn rent or are subsidized fairly pricing deposit insurance eliminates inequitable transfers of wealth but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy gives an efficient separating equilibrium the separating equilibrium segregates the market for insured transactions deposits from private information financial intermediation the analysis in this article provides support for the deposit insurance reform proposal in the recent 1993 national commission on financial institution reform recovery and enforcement ncfirre report to the president and congress and for merton and bodie s 1993 proposal both proposals impose a separating equilibrium that isolates insured transactions accounts and the public information traded assets that secure them from private information assets in the bank s portfolio the formal model developed here is designed to demonstrate the effect of charter policy on the efficiency of market equilibrium in an uncomplicated setting but the main result that a separating equilibrium is more efficient is extremely robust with respect to the model specification the model has two types of financial intermediaries intermediaries that hold nontraded private

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

price response asymmetric information and competition we compare predictions from a theoretical model based on the structure of the main outdoor retail market in jerusalem with the results of an empirical analysis of price response to changes in cost we find that firms without adjacent competition exhibit both upward and downward price rigidity an outcome we ascribe to asymmetric information between the consumer and the firm given that previous studies have focused on downward price rigidities of firms with market power our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity

heterogeneity in price rigidity evidence from a case study using microlevel data we combine two data sets to study price rigidity the first consists of weekly time series of retail wholesale and spot prices for twelve products these time series contain two exogenous cost shocks we find that prices exhibit more rigidity in response to the second shock than the first the second data set consists of all publicly available information about the shocks content analysis of these information reveals that the first shock is larger and more persistent and the market has more information on it than the second we conclude therefore that prices are more flexible in response to cost shocks that are larger that are more persistent and on which market participants have more information

impact of bank competition on the interest rate pass through in the euro area this article analyses the impact of loan market competition on the interest rates applied by euro area banks to loans during the period 1994 2004 using a novel measure of competition called the boone indicator we find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products in line with expectations this result implies that stronger competition causes both lower bank interest rates and a stronger pass through of market rate changes into bank rates evidence of the latter is also presented by our error correction model ecm for bank rates further banks compensate income losses from increased loan market competition by offering lower deposit rates our findings with respect to the loan market rates have important monetary policy implications as they suggest that measures to promote competition in the european banking sector are likely to render the monetary policy transmission mechanism more effective

the effects of consumers price expectations on sellers dynamic pricing strategies abstract the authors propose a dynamic market equilibrium model to investigate how consumers form price expectations and how these expectations influence their sequential search behavior and prices in the market they derive a perfect bayesian nash equilibrium and show that whereas higher current period prices induce search consumers who observe higher historical prices form higher price expectations become more pessimistic and search less furthermore the authors show that when prices increase as a result of an increase in marginal costs consumers respond by searching more which then leads to higher prices and instant price adjustment in contrast because consumer search activities decline when prices fall sellers may respond by lowering their prices just enough to dampen consumers search tendencies when costs decrease the authors test their theoretical model and its implications and find support for it in a series of simulated market experiments

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

retail bank deposit pricing an intertemporal asset pricing approach fundamentally spreads between market and deposit interest rates increase when interest rates rise and decline when rates fall recent empirical studies have found this phenomenon to be related to market concentration static equilibrium models are poorly equipped to explain this behavior in this paper the author applies an intertemporal asset pricing model incorporating bank deposits as a form of money in order to analyze the pricing behavior of a banking sector exercising market power his results extend the theoretical literature on deposit pricing and provide some insights into the behavior of interest rate spreads through time copyright 1995 by ohio state university press

regulations market structure institutions and the cost of financial intermediation this paper examines the impact of bank regulations market structure and national institutions on bank net interest margins and overhead costs using data on over 1400 banks across 72 countries while controlling for bankspecific characteristics the data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation inflation also exerts a robust positive impact on bank margins and overhead costs while concentration is positively associated with net interest margins this relationship breaksdownwhencontrolling for regulatory impediments to competition and inflation furthermore bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection while these institutional indicators robustly explain cross bank net interest margins and overhead expenditures thus bank regulations cannot be viewed in isolation they reflect broad national approaches to private property and competition

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

price and hedging policy the case of an intertemporarily risk averse bank abstract in a two period framework we analyze the behavior of a maturity transforming intertemporarily risk averse bank in the presence of a stochastic inter bank rate and futures markets we show that the separation property holds but that loan and deposit price decisions show non linear dependence

who bears interest rate risk we study the allocation of interest rate risk within the european banking sector using novel data banks exposure to interest rate risk is small on aggregate but heterogeneous in the cross section contrary to conventional wisdom net worth is increasing in interest rates for approximately half of the institutions in our sample cross sectional variation in banks exposures is driven by cross country differences in loan rate fixation conventions for mortgages banks use derivatives to partially hedge on balance sheet exposures residual exposures imply that changes in interest rates have redistributive effects within the banking sector received october 31 2017 editorial decision august 30 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

monetary transmission via the administered interest rates channel abstract this paper examines the dynamics of administered interest rate changes in response to changes in the benchmark money market rate in singapore our results show that the administered rates adjustment speed differs across both financial institutions and financial products the financial institutions administered lending and deposit rates moreover are more rigid when they are below their equilibrium level than when they are above our finding hence implies that the speed of monetary transmission is not uniform across all sectors of the economy and that a tightening monetary policy takes a longer time to impact the economy than an expansionary monetary policy

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

bank funding costs in a rising interest rate environment one key risk to the banking system is how funding costs will change as monetary policy is normalized and interest rates rise after almost a decade of near zero rates our contribution is to develop a model that jointly estimates banks balance sheets and retail interest rates to arrive at a consistent estimate of the change in bank funding costs as market rates change our estimates imply a 100 basis point shock to the federal funds rate would increase overall deposit funding costs by about 40 billion which is roughly equal to 25 of aggregate annual net income for commercial banks and savings institutions we also find that deposit rate responses are largely symmetric in contrast to some previous research showing deposit rates are less responsive to upward movements in reference rates we introduce unique and confidential data on bank deposit betas to anchor our results

multimarket contact competition and pricing in banking abstract in this paper we assess the impact of multimarket contact of banks on their market power by means of a simultaneous equation model in which the divergence of price from marginal cost is a function of multimarket linkages the model is estimated using aggregate data from the italian regions for the years 1997 2009 our results show that multimarket contact is positively and significantly correlated to the market power index and is also connected to both home and non home market concentration the evidence is robust to changes in model specification and multimarket contact measures and supports the idea that firms which have a greater amount of contact are more likely to collude

monetary transmission in the euro area early evidence monetary transmission evidence we examine the euro area monetary policy transmission process using post 1999 data with two main questions in mind has it changed after and because of economic and monetary union emu and if so is it becoming homogeneous across countries given the data limitations we concentrate on three components of the transmission mechanism the banking the interest rate and the asset market channels we find evidence that the transmission through banks has become more potent and homogeneous across countries on the financial market channels our evidence is somewhat weaker but suggestive the interest rate channel appears to have changed even before emu and now affects national economies in a broadly similar way the asset market channel proxied by the stock market effects of monetary policy also seems to work rather homogeneously across national markets no comparison with pre emu is available here a positive answer to both questions raised above represents in our view the best working hypothesis under current knowledge ignazio angeloni and michael ehrmann

are there asymmetries in the response of bank interest rates to monetary shocks this article examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks using an asymmetric vector error correction model it analyses the pass through of changes in money market rates to retail bank interest rates in italy in the period 1985 2002 the main results of the article are 1 the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 consolidated law on banking 2 interest rate adjustment in response to positive and negative shocks is asymmetric in the short run but not in the long run 3 banks adjust their loan deposit rate faster during periods of monetary tightening easing 4 this asymmetry almost vanished since the 1990s

firm organizational heterogeneity and market structure evidence from the japanese pesticide market abstract this paper empirically investigates the effects of the organizational forms of firms on their entry behaviors and market structure to exploit the exogenous variation in firm organizational forms we use japanese pesticide market data first our empirical analysis shows that a model of imperfect competition fits the japanese pesticide market well despite the existence of regulations we then estimate the effect of organizational heterogeneity on entry behavior firms having capital ties with special distribution networks tend to enter this market more readily than do firms without such ties furthermore diversified and vertically nonintegrated firms are more likely to enter this market than are stand alone and vertically integrated firms these findings suggest that markets with distribution related diversified and vertically nonintegrated potential entrants are more competitive than those with the same number of potential entrants that have no such characteristics

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

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