A comment on interest rate pass-through: a non-normal approach

Dong-Yop Oh (), Hyejin Lee () and Karl Boulware
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Dong-Yop Oh: Auburn University at Montgomery
Hyejin Lee: Tuskegee University

Empirical Economics, 2020, vol. 59, issue 4, No 20, 2017-2035

Abstract: Abstract This paper revisits the question of interest rate pass-through from the federal funds rate to bank and open market rates from the years 1987 to 2015. We employ cointegration tests with improved testing power by using information in non-normal errors. Using this approach, we find evidence of cointegration between the federal funds rate and the prime rate, the federal funds rate and the 3-month financial commercial paper rate, but no evidence of cointegration between the federal funds rate and the 30-year conventional mortgage rate. Moreover, we estimate the degree of long-run pass-through for both the prime and commercial paper rates to be less than one. Our results confirm that there is not only significant co-movement between the federal funds rate and short-term borrowing rates, but also that interest rate pass-through, in the long run, is incomplete.

Keywords: Monetary policy; Interest rate pass-through; Cointegration analysis; Non-normal errors; RALS (search for similar items in EconPapers)
JEL-codes: C12 C22 E43 E52 E58 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-019-01696-3

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