Deposit interest rate rigidity and asymmetry: - A study on the Swedish banking market

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: This thesis examines price rigidity and asymmetry in the deposit interest rate setting on the Swedish banking market. We investigate if these patterns can be related to market concentration measured by the Herfindahl-Hirschman index. We apply an error-correction framework to estimate the degree of pass-through of money market interest rate changes to deposit interest rates. Our results indicate an incomplete pass-through in the long-run, which implies that the banking market is not fully efficient. As expected, the pass-through is even more incomplete in the short-run with values between 0.3–0.45. We find evidence of price asymmetry i.e. banks are more reluctant to raise deposit interest rates when the money market rate increases than decrease the deposit interest rates when the money market rate is falling. Finally, when dividing our time-period into three sub-periods, according to HHI-level, we see an indication of a relationship between market concentration and price rigidity and asymmetry.

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