Interest rate pass-through: a nonlinear vector error-correction approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper analyzes pass-through from money market rates to consumer retail loan and deposit rates in Canada from 1983 to 2015 using a nonlinear vector error-correction model. In contrast to empirical frameworks used in previous studies, this model permits estimation of long-run pass-through coefficients while simultaneously accounting for asymmetric adjustments and short-run dynamics. It also allows testing of commonly made assumptions such as exogeneity of the market rate. I find that pass-through was complete for all rates before the financial crisis although only after the mid 1990s for the 1 year mortgage rate. Since the end of the 2008-09 recession, pass-through remains complete in the mortgage market but has significantly declined for deposit rates. Furthermore, many rates adjust asymmetrically but the direction of rigidity differs among rates and time periods. Terms of use: Documents in EconStor mayJEL Codes: C32, E43, E52, G21

Loom of Symmetric Pass-Through

“…11 As a next step, the following 11 hypotheses were tested within the NVECM model for the same specification with the intercept, no trend in the cointegration equation and no intercept in the VAR model. The test statistics of the hypothesis was generated by a wild bootstrap method with 5000 bootstrap samples using the MATLAB R2017b computer program following Popiel (2017) 12 . The results are provided in Tables 8 and 9.…”

“…The number of lags for the Johansen cointegration test specification was chosen by the Schwarz information criterion. This lag is also used in the nonlinear model as suggested by Popiel (2017). Last, following Popiel (2017), the NVECM model was applied to see if there is a long-run pass-through, an asymmetric adjustment and short-run dynamics.…”