Barry Scholnick

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

Abstract 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.

The Economics of Credit Cards, Debit Cards and Atms: A Survey and Some New Evidence

This paper provides a critical survey of the large and diffuse literature on credit cards, debit cards and ATMs. We argue that because there are still many outstanding issues and questions about the pricing, use and substitutability of these payment mechanisms, that there are significant further opportunities for research in these areas. A large number of questions are examined in this survey, including the pricing of credit cards, the impact of networks on the provision and pricing of ATMs, as well as the tradeoffs that consumers make between different types of payment mechanism, including debit cards, credit cards and ATMs. Importantly, this paper is also amongst the first to provide new evidence on this latter question from bank level data (from Spain). We conclude that point of sale (debit card) and ATM transactions are substitutes, and that ATM surcharges impacts point of sale volume significantly.

Interest Rate Asymmetries in Long-Term Loan and Deposit Markets

Studies of U.S. loan and deposit markets have found that consumer interest rates respond asymmetrically to changes in market rates. If this finding is repeated across many different consumer finance product markets, then it could have important implications for the transmission mechanism of monetary policy. This paper tests for significant interest rate asymmetries in consumer finance markets that differ markedly from those examined in the existing literature. The main result of this paper is to reject the hypothesis of significant asymmetries in most (but not all) of the longer-term loan and deposit markets examined in Canada and the United States. This indicates that the explanations for asymmetries given in the literature are not generalizable across different product markets in different countries.

Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?

This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.

Exchange rate expectations and foreign direct investment flows

Exchange Rate Expectations and Foreign Direct Investment Flows. — Theories about exchange rate expectations are difficult to check empirically. We study FDI data to find indirect evidence on the formation of exchange rate expectations by foreign direct investors. Using panel data techniques on exchange rate movements and FDI flows from the United States to 20 OECD countries we find that skewness of devaluations has a robust positive impact on FDI flows while average devaluation and its volatility do not. We view this evidence as consistent with the hypothesis that relatively large exchange rate movements generate mean-reverting long-run expectations. This finding is consistent with survey-based evidence on exchange rate expectations.

Do Exchange Rates Respond to Day-to-day Changes in Monetary Policy Expectations When No Monetary Policy Changes Occur?

This paper addresses whether exchange rates respond to changes in expectations of future U.S. monetary policy when no actual monetary policy changes occur. We employ data on Federal funds futures contracts for extracting a measure of policy expectations, control for the surprise element of macroeconomic news and policy developments, and analyze more than 12 years of daily exchange rate data. Our findings show that continuous day-to-day changes in expectations of future monetary policy are associated in a highly significant and systematic way with day-to-day changes in exchange rates even when no actual monetary policy changes occur. This suggests that monetary policy matters for daily exchange rate determination in more ways than merely through infrequent, actual policy changes.

Retail Interest Rate Rigidity after Financial Liberalization

The argument for financial liberalization in developing countries is, broadly, that administered retail (lending and deposit) interest rates set below their market clearing levels result in the misallocation of credit, and thus retard investment and growth (see Fry 1994). The usual policy prescription in the development literature is therefore to allow commercial banks to determine their own retail interest rates. The fact that the commercial banks have this freedom does not, of course, imply that retail rates will be market clearing. Commercial banks may be sluggish when adjusting their retail rates, implying that the misallocation of credit may remain a problem even after liberalization. Furthermore, sluggish retail interest rate adjustment will increase the lags involved in the transmission of monetary policy. This is clearly an important issue, yet it has received very little attention in the financial liberalization literature. One possible reason for this lack of attention is that much of the literature on price rigidity in the banking system utilizes microeconomic crosssectional data sets -data of a type that is useful for examining issues of market concentration in different geographical markets (see Gilbert 1984). This type of data is typically unavailable for developing econornies. This paper introduces a different approach, using only the time series data that are available. The issue of rigidity is examined using the cointegration and error correction methodology, utilizing results on speeds of adjustment of retail (lending and deposit) rates to changes in wholesale (interbank) rates. A further innovation in the paper is the use of an asymmetric error correction methodology, which makes it possible to examine whether retail rates have greater rigidity upwards or downwards.

The Impact of Wealth on Inattention: Evidence from Credit Card Repayments

Inattentive decision makers do not make full use of information available to them. Existing, psychologically based, explanations for inattention include the impact of competing stimuli and the salience of the decision. These existing explanations, however, do not predict whether richer or poorer individuals are more likely to be inattentive, since either can face competing demands on their limited supplies of attention. We examine this issue using a confidential credit card database of more than one million data points. We document that a proportion of individuals who are delinquent have sufficient surplus funds on deposit, implying that these individuals could have avoided the costs of delinquency if they had been more attentive to their credit card repayments. Using various measures of income and wealth, we provide strong evidence that these inattentive individuals are more likely to be poorer.

Testing a Disequilibrium Model of Lending Rate Determination: The Case of Malaysia

This study examines whether lending rates cleared the market for loans in Malaysia after interest rate liberalization. It is based on a theoretical model in which adverse selection and marginal cost pricing are brought together by the use of a quadratic loss function in the error correction format. This allows for the use of the cointegration methodology. Long-run tests support the model proposed in the paper, while rejecting part of the financial liberalization model. From the short-run results it is concluded that there is a large lag before lending rates respond to exogenous shocks, thus confirming that they do not fully clear the market for loans.

How Do Exogenous Shocks Cause Bankruptcy? Balance Sheet and Income Statement Channels

We are the first to examine whether exogenous shocks cause personal bankruptcy through the balance sheet channel and/or the income statement channel. For identification, we examine the effect of exogenous, politically motivated government payments on 200,000 Canadian bankruptcy filings. We find support for the balance sheet channel, in that receipt of the exogenous cash increases the net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone) required by filers. We also find limited support for the income statement channel, in that exogenous payments reduce bankruptcy filings from individuals whose current expenses exceed their current income.