Author(s)

Laura Parisi¹, Igor Gianfrancesco², Camillo Giliberto³, Paolo Giudici¹

¹Department of Economics and Management, University of Pavia, Pavia, Italy.
²Banco di Desio e della Brianza, Risk Management Division, Desio, Italy.
³Banca Monte dei Paschi di Siena, Siena, Italy.

Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterized by very low monetary rates. The current state of close-to-zero monetary rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows comparing it with the error correction model.

Error Correction Model, Forecasting Bank Rates, Monte Carlo Predictions, Interest Rate Risk Models

Parisi, L. , Gianfrancesco, I. , Giliberto, C. and Giudici, P. (2016) Predicting Bank Interests When Monetary Rates Are Close to Zero. Applied Mathematics, 7, 1-12. doi: 10.4236/am.2016.71001.