Money Creation and Banks’ Interest Rate Setting

Purpose This study aims to examine a potential case of interdependence in loan and deposit interest rate setting. Design/methodology/approach The authors set up a theoretical microsimulation model with endogenous loan interest rate determination via a learning algorithm. Findings The authors show that in certain environments, it may be beneficial for large banks to incorporate information on retail funding costs into the lending rate setting decision. Originality/value The author’s model is based on the realistic money creation mechanism.