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

Michal Popiel

Studies in Nonlinear Dynamics & Econometrics, 2017, vol. 21, issue 5, 20

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. This model permits estimation of long-run pass-through coefficients while simultaneously accounting for asymmetric adjustments and short-run dynamics. In contrast to empirical frameworks used in previous studies, it also allows testing of commonly made assumptions such as exogeneity of the market rate, making inference more robust. 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 2008–2009 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.

Keywords: interest rate pass-through; cointegration; asymmetric adjustment; nonlinear vector error-correction model (search for similar items in EconPapers)
Date: 2017
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Working Paper: Interest Rate Pass-through: A Nonlinear Vector Error-correction Approach (2016)
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DOI: 10.1515/snde-2016-0063

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