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

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  • Petrevski, Goran
  • Bogoev, Jane

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.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 571-593

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Handle: RePEc:eee:ecosys:v:36:y:2012:i:4:p:571-593

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Keywords: Interest rate pass-through; Monetary policy; South East Europe; Time-series; Cointegration; Structural breaks;

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References

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Cited by:
  1. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.
  2. Rustam Jamilov & Balazs Egert, 2013. "Interest Rate Pass-Through and Monetary Policy Asymmetry: A Journey into the Caucasian Black Box," CESifo Working Paper Series 4131, CESifo Group Munich.
  3. Cooray, Arusha & Paradiso, Antonio & Truglia, Francesco Giovanni, 2013. "Do countries belonging to the same region suggest the same growth enhancing variables? Evidence from selected South Asian countries," Economic Modelling, Elsevier, vol. 33(C), pages 772-779.

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