Interest rate dispersion in deposit and loan markets

This paper investigates the existence and determinants of interest rates dispersion in loans and deposits of Spanish banks. A unique feature of the research is that it covers a whole industry (thirty products and two hundred banks) from 1989 to 2003. We find that: i) interest rates dispersion is a persistent phenomena in loans and deposits markets; ii) the differences across products in the observed dispersion can be explained as a function of variables that affect the private net benefits of consumers' investment in information including search costs (frequency and volume of transactions); iii) interest rate dispersion is more sensible to product specific inflation than to changes in the interest rate of the economy; iv) regulation of standards of transparency by the Spanish Central Bank has been effective in reducing interest rate dispersion.

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