A threshold cointegration analysis of interest rate pass-through to UK mortgage rates

Ralf Becker, Denise Osborn and Dilem Yildirim

Economic Modelling, 2012, vol. 29, issue 6, 2504-2513

Abstract: This paper empirically analyses the interest rate transmission mechanism in the United Kingdom by exploring the pass-through of the official rate to the money market rate and of the market rate to the mortgage rate. Potential asymmetries, due to financial market conditions and monetary policy, lead to the use of a nonlinear threshold error-correction model, with hypothesis tests based on nonstandard bootstrap procedures that take into account the discrete nature of changes in the official rate. The empirical results indicate the presence of substantial asymmetries in both steps of the process, with these asymmetries depending on past changes in the money market rate and whether these are motivated by official rate changes. Generalized impulse response function analysis shows that adjustments differ with regard to the sign and magnitude of interest rate changes in a way that is consistent with conditions in the interbank and mortgage markets over the recent period.

Keywords: Interest rate transmission; Mortgage rates; Nonlinear cointegration (search for similar items in EconPapers)
JEL-codes: C51 C52 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (38)

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Working Paper: A threshold cointegration analysis of interest rate pass-through to UK mortgage rates (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2504-2513

DOI: 10.1016/j.econmod.2012.08.004

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