THE CYCLICALITY OF PRICE-COST MARGINS IN BANKING: AN EMPIRICAL ANALYSIS OF ITS DETERMINANTS

Roger A Aliaga-Diaz · María Pía Olivero

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Banking stability, regulation, efficiency Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

We study the determinants of the cyclical behavior of banks' price-cost margins in the United States banking sector, using time series quarterly data for the period 1979–2005. We contribute to the literature by building an empirical model of the countercyclical behavior of these margins first documented by Aliaga-Díaz and Olivero (2010a). Doing so we are able to explore potential explanations for this behavior, and to show that margins are consistently countercyclical, even after controlling for the effects of credit risk and monetary policy. As a mechanism for the propagation of aggregate shocks, the countercyclical nature of margins in banking can provide additional support to stabilization policy. (JEL E32, E44, G21)

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References

1998The Financial Accelerator in a Quantitative Business Cycle Framework 1988Agency Costs, Net Worth, And Business Fluctuations 1989The federal funds rate and the channels of monetary transmission 1999Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series 1990Inference in Linear Time Series Models with some Unit Roots 2000What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?1996The Financial Accelerator and the Flight to Quality 1992Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance

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