tailieunhanh - Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore

Gilt sale and repurchase (“gilt repo”) transactions involve the temporary exchange of cash and gilts between two parties; they are a means of short-term borrowing using gilts as collateral. The lender of funds holds gilts as collateral, so is protected in the event of default by the borrower. General collateral (GC) repo rates refer to the rates for repurchase agreements in which any gilt may be used as collateral. Hence, GC repo rates should in principle be close to true risk-free rates. Repo contracts are actively traded for maturities out to one year; the rates prevailing on these contracts are. | Journal of International Money and Finance Vol. 15 No. 3 pp. 485-496 1996 Pergamon Copyright 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved S0261-5606 96 00016-2 0261 -5606 96 Asymmetric adjustment of commercial bank interest rates evidence from Malaysia and Singapore BARRY SCHOLNICK Faculty of Business University of Alberta Edmonton T6G 2R6 Canada This paper examines the rigidity of commercial bank interest rates using evidence from Singapore and Malaysia. An asymmetric error correction technique is used to test whether mean adjustment lags are different when retail rates are above or below their equilibrium levels. It is concluded in both countries that the mean adjustment lag is shorter when the deposit rate is above its equilibrium than when it is below its equilibrium. Using the framework of Hannan and Berger 1991 this finding implies that the hypothesis of collusion cannot be rejected. JEL G21 . Copyright 1996 Elsevier Science Ltd This paper examines the rigidity of commercial bank retail interest rates in Singapore and Malaysia. While the rigidity of commercial bank interest rates has received some attention within the context of developed countries . Hannan and Berger 1991 Neumark and Sharpe 1992 it has received much less attention within the context of developing economies. This is unfortunate given that the relative rigidity of commercial bank rates has important implications for programs of financial liberalization. The standard policy proposition from the financial liberalization literature Fry 1988 is that administered lending and deposit rates result in the misallocation of credit and thus the distortion of investment decisions. A point that it is often ignored in the financial liberalization literature however is that even after state controls on retail interest rates have been lifted interest rate rigidity may still persist because of the behavior of the banks. Most of the existing literature on interest rate .