Estimating Price Elasticities on the Hungarian Consumer Lending and Deposit Markets: Demand Effects and Their Possible Consequences

In this paper, we use bank product and consumer level data and estimate a random coefficient logit model (RCL) to calculate price elasticities on the Hungarian consumer lending and retail deposit markets in line with the most recent developments in the literature on discrete choice demand estimation. The findings indicate that, on average, demand for domestic currency-denominated loans is more price sensitive than demand for foreign currency loans. The results also suggest that there is an asymmetric substitution effect toward foreign currency- denominated loans as a result of a price increase of domestic currency-denominated loans (i.e. a rise in interest rates on HUF-denominated loans increases the demand for foreign currency loans more than a rise in interest rates on foreign currency loans increases the demand for HUF-denominated loans). Finally, as the substitution effect toward foreign currencydenominated loans is stronger, it might weaken the effectiveness of the interest and exchange rate channels of monetary transmission.