The prime rate-deposit rate spread and macroeconomic shocks

Bradley T. Ewing, Jamie Brown Kruse

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

1 Scopus citations

Abstract

This paper examines the response of the prime rate-deposit rate spread to shocks in real output growth, inflation, and the stance of monetary policy. A simple model of the lending and deposit markets is introduced that provides insight as to howthese macroeconomic factorsmight affect the spread. The paper employs the recently developed technique of generalized impulse response analysis proposed. This method does not impose a priori restrictions as to the relative importanceeachof thevariables intheunderlyingvectorautoregressionmayplayinthetransmission process. Thus, the results provide robust evidence as to the relationship between the prime rate-deposit rate spread and these macroeconomic factors. Specifically, the model suggests and the empirical results confirm that shocks to inflationwiden the spread while unexpected changes in the federal funds rate and real output growth lead to a narrower spread.

Original languageEnglish
Title of host publicationAdvances In Quantitative Analysis Of Finance And Accounting (Vol. 5)
PublisherWorld Scientific Publishing Co.
Pages181-197
Number of pages17
ISBN (Electronic)9789812772213
DOIs
StatePublished - Jan 1 2007

Keywords

  • Interest rates
  • Macroeconomic shocks
  • VAR

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