Interest rate pass-through in South East Europe: An empirical analysis

Goran Petrevski and Jane Bogoev

Economic Systems, 2012, vol. 36, issue 4, 571-593

Abstract: This paper investigates the effectiveness of the interest rate channel in three small open economies with rigid exchange rate regimes in South East Europe – Bulgaria, Croatia and Macedonia – during the period 2000–2010. Specifically, we examine the size and speed of adjustment of bank lending rates to the changes in money market rates by employing various cointegration methods. In addition, we assess the stability of interest rate passthrough during the transition period, including the recent economic crisis. The results reveal the existence of a cointegrating relationship among some of the interest rates. We find that the long-run pass-through is far from complete with the exception of Macedonia. The shortrun adjustment of lending rates is also low and sluggish, implying that the domestic monetary policy may have a limited impact on the interest rate channel. Finally, the econometric investigation provides mixed evidence on the stability of the interest rate pass-through. Therefore, the overall findings of the paper support the view that in small open economies with rigid exchange rates the effectiveness of domestic monetary policy through the interest rate channel is quite limited.

Keywords: Interest rate pass-through; Monetary policy; South East Europe; Time-series; Cointegration; Structural breaks (search for similar items in EconPapers)
JEL-codes: C22 E4 E50 E52 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:36:y:2012:i:4:p:571-593

DOI: 10.1016/j.ecosys.2012.03.001

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