Bank interest rate adjustments: Are they asymmetric?

Abstract

This paper is concerned with the asymmetric adjustments between three Australian bank interest rates: a bank bill rate, a loan rate and a deposit rate. A multivariate asymmetric error-correction model is applied to capture the interplay of long-run relationships between the levels of the rates and short-run relationships between the changes in the rates. The empirical analysis, for the sample period 1990:01-2000:04, shows that interest rate adjustments, in response to positive and negative shocks, are assymetric in the short run, but not in the long run. In particular, the results suggests that bank adjust their loan and deposit rates, in response to a change in the bank-bill rate, at a fast..