We propose a model in which the evolution of interest rate margin (markup) in banking is the outcome of two major components: (i) dynamic oligopolistic conduct and (ii) dynamics of market fundamentals. The model is specified such that oligopolistic dynamics are separated from the dynamics of fundamentals. Consistent with the theory, we employ the error-correction model which generates results indicating that margins are significantly different from the traditional measure once fundamentals are filtered out.
Bibliographical noteFunding Information:
We thank Aharon Meir Center for Banking at Bar-Ilan University for financial support. We are grateful to Pedro Pita Barros, Michael Beenstock, Ben Eden, David Genesove, Margaret Slade, Yossi Spiegel, and seminar participants at the Bank of Israel, The Hebrew University, the 27th E.A.R.I.E conference in Lausanne. The participants in the 2005 Berlin conference on Bank Relationship, Credit Extension and the Macro-Economy. We also thank the participants in the Second Tel-Aviv Workshop on Industrial Organization and Anti-Trust, especially Sofronis Clerides, Chaim Fershtman, David Gilo, Ariel Pakes and Bob Willig raised very important and constructive issues.
ASJC Scopus subject areas
- Economics and Econometrics