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

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  • Becker, Ralf
  • Osborn, Denise R.
  • Yildirim, Dilem

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.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 6 ()
Pages: 2504-2513

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2504-2513

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Interest rate transmission; Mortgage rates; Nonlinear cointegration;

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References

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Cited by:
  1. Papadamou, Stephanos, 2013. "Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates," Economic Modelling, Elsevier, vol. 33(C), pages 545-551.
  2. A.H. Ahmad & Nusrate Aziz & Shahina Rummun, 2013. "Interest Rate Pass-Through in the UK: Has the Transmission Mechanism Changed During the Financial Crisis?," Economic Issues Journal Articles, Economic Issues, vol. 18(1), pages 17-38, March.
  3. Dilem Yildirim, 2012. "Interest Rate Pass-Through to Turkish Lending Rates: A Threshold Cointegration Analysis," ERC Working Papers 1207, ERC - Economic Research Center, Middle East Technical University, revised Sep 2012.
  4. Paraschiv, Florentina, 2012. "Adjustment Policy of Deposit Rates in the Case of Swiss non-Maturing Savings Accounts," Working Papers on Finance 1219, University of St. Gallen, School of Finance.

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