Interest rate volatility and retail interest rate pass-through in the case of the Malaysian economy

Mohammed Nur Hussain and Bodrun Nahar ()
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Bodrun Nahar: Swinburne University of Technology, Malaysia

Journal of Developing Areas, 2016, vol. 50, issue 5, 277-294

Abstract: The purpose of this study is to explore the interest rate pass-through mechanism among three interest rates (discount rate, deposit rate and lending rate) in the Malaysian economy by conducting the asymmetric threshold autoregression (TAR) and momentum threshold autoregressive (MTAR) techniques and EC-EGARCH (1,1)-M model over the period January 1990 to July 2013. Moreover, we also examine the impact of the global financial crisis of 2008-2009 on these interest rates. The existence of asymmetric threshold cointegration relationships have been found between two interest rates in TAR and MTAR models, whereas only a symmetric cointegration relationship has been found between lending and discount rate in the MTAR model. The estimation of the ECEGARCH (1,1)-M model shows that the effect of interest rates volatility (deposit rate and lending rate) on the discount rate differs in this economy. Upward rigid adjustment has been recognized in both models. In addition, leverage effect has been found visible for both models. Further, the global financial crisis of 2008-2009 does not show any significant changes in the speed and size of the pass through of different interest rates. The responses of the discount rate, to both deposit and lending shocks, are found positive, while the lending shock is found decreasing after the 6th period by using the impulse response function.

Keywords: Interest rate pass-through; Interest rate volatility; Asymmetric threshold cointegration (search for similar items in EconPapers)
JEL-codes: C22 E43 E52 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.50:year:2016:issue5:pp:277-294

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