TAILIEUCHUNG - Retail Bank Interest Rate Pass-Through: The Turkish Experience

Loan rates can be separated into two major components – the interest rate paid to depositors and the rate added on by banks. That difference between the deposit rate and the loan rate is commonly referred to as the spread. The size of banking spreads serves as an indicator of efficiency in the financial sector because it reflects the costs of intermediation that banks incur (including normal profits). Some of these costs and are imposed by the macroeconomic, regulatory and institutional environment in which banks operate while others are attributable to the internal characteristics of the banks. | International Research Journal of Finance and Economics ISSN 1450-2887 Issue 28 2009 EuroJournals Publishing Inc. 2009 http Retail Bank Interest Rate Pass-Through The Turkish Experience Bilge Kagan Ozdemir1 Department of Economics Anadolu University Turkey Yunus Emre Campus 26470 Turkey E-mail kaanozdemir@ Abstract This paper intends to investigate the relationship between a money market rate and banks retail rates by empirically examining the pass-through process in the banking system of Turkey for the period between April 2001 and June 2007. We also aim to highlight the main factors that influence the price setting behavior of banks. The main findings from symmetrical and asymmetrical error-correction models suggest that the pass through from the market rate to deposit and lending rate is complete in the long run while in the short run lending rate shows more flexibility relative to deposit rate. In addition there is greater rigidity in deposit and lending rate decreases than increases and retail interest rates does not adjust asymmetrically to an increase or a decrease in money market rate in Turkey. Keywords Interest rate pass-through retail interest rates Turkish banking system ECM JeL Classification Codes E43 E52 G21 1. Introduction This study deals with the relationship between a money market rate and banks retail rates in the banking system of Turkey by empirically examining the pass-through that is defined as the degree and the speed of adjustment of interest rates to money market rate. Most central banks use a short-term interest rate as their instrument of monetary policy. Changes to this short term interest rate are the first important stage in the transmission of monetary policy. The transmission mechanism is usually sluggish and incomplete in the short term but rather complete in the medium and long-term. Thus changes in the local currency money market rate induced by monetary policy decisions or by changing .

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