Commercial Loan Rate

Empirical literature on the determinants of the commercial loan rate on a time
series basis is limited. In this section we estimate a commercial loan rate equation
over the quarterly period 1952 through 1980. There are four categories of
empirical tests: tests of specifications of the commercial loan rate based on
the theoretical results developed in Section I; tests for the stability of the
behavior of the commercial loan rate during the 1960s and 1970s; tests for the presence
of “stickiness” or partial adjustment in the loan rate which has implications for
the credit rationing hypothesis; and tests for effects of deposit markets on
loan rates. The previous literature on the time series determinants of commercial loan
rates consists primarily of Jaffee and Goldfeld  in which the loan rate
is a function of three types of variables: the yields on competing assets in
bank portfolios;  the loan/deposit ratio; and deposit market variables. The
first type of variable is consistent with the model in this paper, but the other two
types are not. In our rate-setting model, the loan/deposit ratio is a measure of
the consequences of bank actions, not a variable which infiuences the commercial loan rate.”
Moreover, if the liquidity constraint is not binding, the presence or absence of a
CD market (or other specific deposit market) should not affect the commercial loan rate.

Commercial Loan Rate

Additional Commercial Loan Rate

There are three additional characteristics of previous empirical work on commercial loan rate equations,

The sum of the steady state coefficients of open
market rates is small, for example, approximately 0.5 in Jaffee and Goldfeld
and Ando, which means that a rise in open market rates of 100 basis points
induces a steady-state increase in loan rates of only 50 basis points. This result
conflicts with the theory of financial intermediation and implies that the effect
of a change of monetary policy is not fully transmitted to customers in the
commercial loan stock market through the loan rate, Previous studies using lagged
dependent variables found that loan rates adjust to equilibrium at the rate of 25
to 50% per quarter, so that the loan market is also slow to refiect changes in
monetary policy. Both Jaffee and Goldfeld find that the initiation of the CD
ma rke t” lowered commercial loan rates and that runoffs in CDs during the 1960s
caused by Regulation Q ceilings resulted in higher commercial loan rates. This
result implies that alterations in Regulation commercial loan rate ceilings can directly affect
investment in real capital. In contrast, the model in Section I indicates that the
optimal commercial loan rate is invariant to deposit market conditions.