TAILIEUCHUNG - The Duration of Bank Retail Interest Rates BY Ben R. Craig and Valeriya Dinger

This pattern has two main implications. First, if we take loan size as a proxy for the poverty of customers (smaller loans roughly imply poorer customers), microfinance banks appear to serve many customers who are substantially better-off than the customers of nongovernmental organizations. Second, banks will have an easier time earning profits (assuming that a large fraction of the cost of making loans is due to fixed costs). When both large and small loans require similar outlays for screening, monitoring, and processing loans, the small loans will be far less profitable unless interest rates and fees can. | The Duration of Bank Retail Interest Rates Ben R. Craig and Valeriya Dinger Working Paper 88 November 2011 INSTITUT FUR EMPIRISCHE WIRTSCHAFTSFORSCHUNG University of Osnabrueck Rolandstrasse 8 49069 Osnabruck Germany The Duration of Bank Retail Interest Rates Ben R. Craig and Valeriya Dinger Abstract We use bank retail interest rates as price examples in a study of the determinants of price durations. The extraordinary richness of the data allows us to address some major open issues from the price rigidity literature such as the functional form of the hazard of changing a price the effect of firm and market characteristics on the duration of prices and asymmetry in the speed of adjustments to positive and negative cost shocks. We find that the probability of a bank changing its retail rate initially that is in roughly the first six months of a spell increases with time. The most important determinants of the duration of retail interest rates are the cumulated change in the money market interest rates and the policy rate since the last retail rate change. Among bank and market characteristics the size of the bank its market share in a given local market and its geographical scope significantly modify retail rate durations. Retail rates adjust asymmetrically to positive and negative wholesale interest rate changes the asymmetry of the adjustment is reinforced in part by the bank s market share. This suggests that monopolistic distortions play a vital role in explaining asymmetric price adjustments. Key words price stickiness interest rate pass-through duration analysis hazard rate We thank Antonio Antunes Christian Bayer Diana Bonfim Tim Dunne Eduardo Engel Roy Gardner James Thomson Jurgen von Hagen and participants of the University of Bonn MacroWorkshop Banco de Portugal Research Seminar and the 2010 European Economic Association meetings for useful comments on earlier versions and Monica Crabtree-Reusser for editorial assistance. Dinger gratefully acknowledges .

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