This paper contributes to the empirical literature on the behavior of lending rates by focusing on the Italian bank loan market. The Italian case is particularly relevant for two reasons. First, bank lending still represents the bulk of total financial flows to the private sector. Second, the stickiness of Italian lending rates has long been recognized as a serious impediment to the transmission of monetary policy.
More specifically, the paper provides an econometric measure of the degree of lending rate stickiness in Italy and compares it with the measures obtained for a sample of 30 industrial and developing countries. Then, the paper analyzes the structural factors affecting the stickiness of lending rates, pointing at the effects of constraints on competition within the financial market. The analysis is based not only on cross-country comparisons, but also on microeconomic data on lending rates charged by 63 Italian banks acting in different financial environments within Italy. The paper shows that differences in the degree of lending rate stickiness among Italian banks are mainly due to the different degree of concentration of the local loan markets in which banks operate: banks operating in less concentrated, more competitive markets adjust their lending rates faster.
Next, the paper discusses the implications for lending rates of the liberalization of Italian financial markets that characterized the early 1990s. It argues that this liberalization should lead to a reduction of lending rate stickiness and to a faster transmission of monetary policy, Indeed, there is already evidence that the degree of stickiness, while still high, has substantially declined.
Finally, the paper argues that the stickiness of Italian lending rates is also due to a form of “discount rate addiction” typical of countries in which the discount rate is used as monetary policy signal. De-emphasizing the discount rate is likely to increase the response of banks to money market changes but would deprive the central bank of a powerful instrument to spur banks’ reactions, whenever needed.