Sluggish adjustment of interest rates and credit rationing: an application of unit root testing and error correction modelling

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Abstract:

A model with credit rationing due to asymmetric information is combined with a marginal cost pricing approach to bank behaviour. The resulting model allows for explanation of the adjustment of deposit and loan rates to changes of the money market rate and is estimated in error correction form. Johansen's procedure is used to test the hypotheses. The hypothesis that deposit and loan rates do not adapt immediately to changes in the money market rate cannot be rejected based on German monthly data. The observation that loan rates react even slower than deposit rates can be rationalized by the effects of asymmetric information.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/000368499324255

Publication date: March 1, 1999

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