The link between interest rates on interbank money and for credit lines: are asymmetric interest rate adjustments empirically evident?

Petra Korndörfer

No FS IV 97-37, Discussion Papers, Research Unit: Market Dynamics from WZB Berlin Social Science Center

Abstract: The paper investigates the behaviour of banks with regard to the pricing of commercial short term loans over the period from 1975 until 1997. Due to the inclusion of interest rate quotes by banks located in east Germany in 1991 we distinguished between the subperiods from 1975 – 1989 and 1991 – 1997. In the context of the price setting for credit lines we focus on the commonly held belief of asymmetric interest rate adjustments. In order to raise the markup on credit lines banks adjust rates on credit lines slower when refinance rates are decreasing. Estimating error correction models a longterm relation between the rate for interbank money and for credit lines is established. In order to test for asymmetric interest rate adjustments non-symmetric error correction models as well as error correction models with asymmetric short-term dynamics are estimated. The hypothesis of asymmetric interest rate adjustments is confirmed largely by the estimation results of the latter specification while in the former specification no asymmetry is found.

Date: 1997
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