TAILIEUCHUNG - Temi di discussione: Are there asymmetries in the response of bank interest rates to monetary shocks?

This paper examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), 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 paper 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. | BANC A D ITALIA Temi di discussione del Servizio Studi Are there asymmetries in the response of bank interest rates to monetary shocks by L. Gambacorta and S. lannotti Number 566 - November 2005 The purpose of the Temi di discussione series is to promote the circulation of working papers prepared within the Bank of Italy or presented in Bank seminars by outside economists with the aim of stimulating comments and suggestions. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank. Editorial Board Giorgio Gobbi Marcello Bofondi Michele Caivano Andrea Lamorgese Francesco Paternò Marcello Pericoli Alessandro Secchi Fabrizio Venditti Stefania Zotteri. Editorial Assistants Roberto Marano Cristiana Rampazzi. ARE THERE ASYMMETRIES IN THE RESPONSE OF BANK INTEREST RATES TO MONETARY SHOCKS by Leonardo Gambacorta and Simonetta lannotti Abstract This paper examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model AVECM 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 paper 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. JEL classification E43 E44 E52. Keywords monetary policy transmission interest rates asymmetries liberalization. Contents 1. 2. Some institutional characteristics of the Italian banking 3. Data. 9 4. The VAR 5. Cointegration properties of interest 6. The Asymmetric Vector Error Correction Model

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