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

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  • A.H. Ahmad
  • Nusrate Aziz
  • Shahina Rummun

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eis:articl:113ahmad
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    3. Mordi, Charles N. O. & Adebiyi, Michael A. & Omotosho, Babatunde S., 2019. "Modelling interest rates pass-through in Nigeria: An error correction approach with asymmetric adjustments and structural breaks," MPRA Paper 96171, University Library of Munich, Germany.
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    5. Thi Hang Ngo & Akira Ariyoshi & Thi Xuan Anh Tran, 2021. "Interest rate pass‐through and exogenous factors: Evidence from Vietnam," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1299-1317, January.

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