No. 135. REASSESSING THE ASYMMETRIES AND RIGIDITIES IN THE INTEREST RATE PASS THROUGH PROCESS: A HIDDEN CO-INTEGRATION APPROACH

Published in DISCUSSION PAPERS

Y. Panagopoulos, A. Spiliotis. 2014. 

 

This paper reassesses the existing asymmetries and rigidities in the interest rate pass through transmission channels, applied in the advanced economies of US, UK, Canada, Japan and Euro zone (G5). The Crouching Error Correction Model econometric methodology is applied. This method allows us to distinguish the existing asymmetries, based on: first, the speeds of reaction, and second, the time needed for pass through completeness of the asymmetries. Also, it allows for a more thorough consideration in the dynamics of the pass through channels, as data is split in two pieces- the positive and the negative movements (changes). Our empirical findings suggest that: first, a homogenous behaviour (a feedback relationship) for all G5 banking systems is observed regarding the wholesale interest rate policy/vehicle variable choice. However in US and Canada the monetary policy targeting should rather focus more directly on the money market (MM) rates transmission channel instead of the central bank (CB) rates one for efficiency reasons. Second, a non-homogenous price rigid and asymmetric behaviour is found regarding the G5 loan-deposit markets. The empirical distinguishing and accurate measurement of the different aspects of the pass through interest rate process improves our understanding of the nature of the process and perhaps more importantly, can help us to upgrade the practical efficiency in conducting monetary policy actions in a country by country and in a G5 (coordinated) level, as well.

 

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