Monetary transmission models for bank interest rates

Laura Parisi, Igor Gianfrancesco (), Camillo Gilberto () and Paolo Giudici
Additional contact information
Igor Gianfrancesco: Banco di Desio e della Brianza, Risk Management Division
Camillo Gilberto: Banca Monte dei Paschi di Siena

No 101, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterised by very low monetary rates. The current state of close-to-zero interest rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows to compare it with the error correction model. We also contribute to the literature on interest rate risk modelling proposing a forward looking method to allocate on-demand deposits to non-zero time maturity bands, according to the predicted bank rates.

Keywords: Error Correction Model; Forecasting Bank Rates; Monte Carlo predictions; Interest Rate Risk models (search for similar items in EconPapers)
JEL-codes: C15 C20 E47 G32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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