NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Do Banks Set Interest Rates?

Leonardo Gambacorta

NBER Working Paper No. 10295
Issued in February 2004
NBER Program(s):   ME

The aim of this paper is to study cross-sectional differences in banks interest rates. It adds to the existing literature in two ways. First, it analyzes in a systematic way both micro and macroeconomic factors that influence the price setting behavior of banks. Second, by using banks' prices (rather than quantities) it provides an alternative way to disentangle loan supply from loan demand shift in the bank lending channel' literature. The results, derived from a sample of Italian banks, suggest that heterogeneity in the banking rates pass-through exists only in the short run. Consistently with the literature for Italy, interest rates on shortterm lending of liquid and well-capitalized banks react less to a monetary policy shock. Also banks with a high proportion of long-term lending tend to change their prices less. Heterogeneity in the pass-through on the interest rate on current accounts depends mainly on banks' liability structure. Bank's size is never relevant.

download in pdf format
   (348 K)

email paper

This paper is available as PDF (348 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10295

Published: Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.

Users who downloaded this paper also downloaded these:
Fukuda The Impacts of Bank Loans on Economic Development: An Implication for East Asia from an Equilibrium Contract Theory
Friedman and Kuttner w16165 Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?
Goodfriend and McCallum w13207 Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration
Diamond and Rajan w15197 Illiquidity and Interest Rate Policy
Demirguc-Kunt, Laeven, and Levine w9890 Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us