Interest rate gap determinants: A global perspective

Abstract

This article is focused on an important financial issue – the gap between the interest rate required for granted loans (ask interest rate) and interest rate paid for demand and term deposits (bid interest rate) in the banking sector. This interest rate gap represents the profit associated to commercial banking sector and it is, according to economic theory, sensitive to various factors. This paper discusses the theoretical background of the interest rate gap and a few related concepts: time preference, interest rates, capital, banking profits, etc. The research hypotheses are derived from the theoretical background and are empirically tested by using panel data analysis methodology (fixed and random effects). The paper provides a perspective from global financial markets by using a panel of 78 countries with data covering the period between 1999 and 2014. The conclusions of the research confirm the hypothesis that the interest rate gap is influenced by monetary expansion and by financial development and sophistication of countries included in the study. The empirical test results do not confirm the influence of government or state activity in general on such gap.