Dynamic lag structure of deposits and loans interest rates and business cycles formation

Bijan Bidabad () and Abul Hassan

Journal of Financial Regulation and Compliance, 2017, vol. 25, issue 2, 114-132

Abstract: Purpose - This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach - The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings - The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications - The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications - The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value - Regarding the applied method, the topic is new.

Keywords: Business cycle; Banking sector; Macroeconomics; Interest rate; Banking crisis; Lag structure; E32; E43; G01 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-09-2016-0078

DOI: 10.1108/JFRC-09-2016-0078

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