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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Modeling the Whole Firm: The Effect of Multiple Inputs and Financial Intermediation on Bank Deposit Rates
Elizabeth K. Kiser

Abstract: Empirical studies of price competition typically analyze the direct effects of market structure, cost, and local demand on prices; this approach has been applied widely to studies of bank deposit rates. However, the theory of the banking firm suggests that substitutability between sources of deposits and conditions in the bank loan market should also affect the pricing of retail deposits. This paper develops a theoretical model to incorporate these effects, and tests the predictions empirically using institution-level deposit rate data from Bank Rate Monitor. The results suggest that the cost of large-scale deposits affects how banks price retail deposits, and that conditions in lending markets feed back into retail deposit rates.

Keywords: Financial intermediation, deposit rates

Full paper (723 KB PDF)

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Last update: February 17, 2004