Nexus between the banking sector interest rate spread and interbank borrowing rate: An econometric investigation for Bangladesh

This study examines the causal relationship among Interest Rate Spread1 (IRS), investor and depositor burden of IRS and interbank borrowing rate of Bangladesh for the period April 2009-November 2015. By taking care of all properties of time series data the paper has addressed the issue of short run dynamics within the long run relationship of these four variables. The empirical results show that aforementioned four variables are highly cointegrated, implying that there is a stable long run relationship among them. Similarly, the estimated error correction model shows that there is bi-directional causality among these four variables. However, Granger causality test shows that there is a unidirectional causality running from IRS and interbank borrowing rate to both investor and depositor burden of IRS and there is a bi-directional causality between IRS and interbank borrowing rate implying that when IRS increases both depositors and investors suffer and interbank borrowing rate (hence, monetary policy) has significant role to play in the reduction of IRS and its' components in Bangladesh. Our findings also confirm that Bangladesh investors bear the major portion of IRS burden.