ON THE CAUSES AND CONSEQUENCES OF SAVINGS AND LOAN DEPOSIT RATE INFLEXIBILITY.

The inflexibility of Savings and Loan deposit rates in relation to the interest rate on new mortgages is a frequently observed and highly significant phenomenon. This sluggishness of response is an important determinant of the cyclical flows of funds to and from the Savings and Loan industry. Its consequences for the cost and availability of home mortgages are both predictable and direct. The relative inflexibility of the deposit rate can be explained in two distinct, although not mutually exclusive, ways. On the one hand, there are a set of justifications which are grounded in the microtheory of the S&L firm. We shall refer to these as "structural" explanations. Such explanations examine the individual firm in a context free of regulatory constraints and seek to show that a low elasticity of the deposit rate with reference to the mortgage rate is a predictable implication of rational, profit maximizing firm behavior. Thus, the cyclical flows of funds to and from the S&L industry would appear to be an inherent characteristic of the free functioning of such an industry. [ABSTRACT FROM AUTHOR]