Empirical Study of Interest Rate Pass-Through Before and After Subprime Mortgage Crisis: An International Evidence

Abstract

The emergence of financial crisis in 2008 that shook many countries in the world has made essential changes in the path of monetary policy transmission mechanisms in various countries. One of the critical changes in the transmission mechanism is the change in the magnitude of interest rate channel adjustment in the period before and after a crisis. This study aims to evaluate the performance of monetary policy by examining and testing the magnitude of lending and savings interest rates adjustment in response to changes in market interest rates in the period before and after the global financial crisis. This study covers 41 world countries representing three groups: regional, income, and inflation targetting policy groups. The method used in this research is Autoregressive Distributed Lag (ARDL) which calculates the long-term coefficient, and Error Correction Model (ECM), which calculates the short-run coefficient. The results show that long-term coefficients of pass-through into deposits for all regions are greater than the pre-crisis period in the post-crisis period, except for North America and Inflation Targeting Countries. Meanwhile, long-term pass-through coefficients into lending have smaller coefficients in the post-crisis period than before the crisis for all regions except Latin America and the Caribbean, Europe, and Inflation Targeting Countries.