No. 566 - Are there asymmetries in the response of bank interest rates to monetary shocks?

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by Leonardo Gambacorta and Simonetta IannottiNovember 2005

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.

Published in 2007 in: Applied Economics, v. 39, 19, 2503-2517

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