Until 1994, the US prime rate was said to be sticky because of its irresponsiveness to short-term interest rates. After the Fed started the practice of announcing its intended funds rate in 1994, however, the prime rate has come to react immediately to shifts in the target rate. This paper attempts to explain how the Fed’s policy announcements changed the behavior of the prime rate by using a simple menu cost model. It shows that an increase in the expected duration of funds rate targets was essential to the improvement in the target rate pass-through.

Relationship lending is broadly interpreted as a strong partnership between a lender and a borrower. Nevertheless, we still lack consensus regarding how to quantify the strength of a lending relationship, while simple statistics such as the frequency and volume of loans have been used as proxies in previous studies. Here, we propose statistical tests to identify relationship lending as a significant tie between banks. Application of the proposed method to the Italian interbank networks reveals that the fraction of relationship lending among all bilateral trades has been quite stable and that the relationship lenders tend to impose high interest rates at the time of financial distress.