Interest Rate Pass-Through in the UK: Has the Transmission Mechanism Changed During the Financial Crisis?

Ahmad Hassan Ahmad, Nusrate Aziz and Shahina Rummun

Economic Issues Journal Articles, 2013, vol. 18, issue 1, 17-38

Abstract: Interest rate has been the monetary policy tool used by the modern central banks. For monetary policy to be effective, changes in the policy rate should influence the short-term money market rate and retail rates. Using an error correction methodology, this paper examines the short-run and long-run dynamics of interest rate pass through from the LIBOR to four different UK retail rates. The results indicate that interest rate pass-through in the UK is incomplete in the short run, but fairly complete in the long-run and the adjustment of retail rates depend on whether they are below or above their respective long-run values. The results also indicate a temporary, but statistically significant change in the interest rate pass-through since the beginning of the financial crisis in 2007.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eis:articl:113ahmad

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