SEARCH

SEARCH BY CITATION

Keywords:

  • C32;
  • C53;
  • E43;
  • E44;
  • forecasting;
  • factor models;
  • interest rates;
  • pass-through

In this paper, we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates—a level, slope, curvature model, and a principal components model—before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.