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Interest Rate Pass-Through in Nepal

Author

Listed:
  • Nephil Matangi Maskay,Ph.D.

    (Nepal Rastra Bank)

  • Rajendra Pandit

    (Nepal Rastra Bank)

Abstract

The paper examines the interest rate pass through of the policy interest rate to the market interest rate in Nepal. The span of the empirical exercise covers the phase of interest rate liberalization commencing from the first quarter of 1989/1990 to the final quarter of 2008/2009. The result suggests that there is a significant long run elasticity coefficient of the policy rate (taken to be the bank rate) to the different market rates (e.g. 1 yr fixed deposit, lending rate and saving rate), but there is only one error correcting relationship between the bank rate and the lending rate in the short run. However, the speed of adjustment, i.e. the adaptation coefficient, indicates a weaker adjustment of the short-term dynamics to the long run equilibrium. Looking at the sub-sample, which coincides with the promulgation of the NRB Act 2002, the period starting from the third quarter of 2001/2002 to the final quarter of 2008/2009, suggests that there is insignificant elasticity coefficient between the policy rate and two of the above-mentioned market rates. Paradoxically, while the elasticity coefficient between the policy rate and lending rate is found to be significant, it is negative! Overall, the situation indicates that at present, the bank rate in Nepal is ineffective in influencing the market rates and suggests that there are other factors at play. The paper ends by recommending introduction of a more effective indicator of monetary stance, greater awareness of external factors when making monetary policy, and enhancing and guiding the development of the domestic financial sector for equitable financial development and growth.

Suggested Citation

  • Nephil Matangi Maskay,Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 22(1), pages 1-18, April.
    • Handle: RePEc:nrb:journl:v:22:y:2010:p:1
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    References listed on IDEAS

    as
    1. Nephil Matangi Maskay, Ph.D. & Satyendra Raj Subedi, 2009. "Development of the Nepalese Financial System: Need for the Formulation of a Master Plan," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 21, pages 1-2, April.
    2. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Nephil Matangi Maskay Ph.D. & Satyendra Raj Subedi, 2009. "Development of the Nepalese Financial System: Need for the Formulation of a Master Plan," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 21, pages 31-51, April.
    5. Xin Long & Mr. Mangal Goswami & Andreas Jobst, 2009. "An Investigation of Some Macro-Financial Linkages of Securitization," IMF Working Papers 2009/026, International Monetary Fund.
    6. Nephil Matangi Maskay, 1998. "The Impact of the Indian Monetary Policy and the Official Exchange Rate of Nepalese Monetary Policy," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 10, pages 44-63, April.
    7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    8. Alexander F. Tieman, 2004. "Interest Rate Pass-Through in Romania and Other Central European Economies," IMF Working Papers 2004/211, International Monetary Fund.
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    Citations

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    Cited by:

    1. Tomoya Suzuki, 2019. "Counterfactual Inflation Targeting in Nepal," South Asian Journal of Macroeconomics and Public Finance, , vol. 8(2), pages 97-117, December.
    2. Suman Neupane, 2011. "Examining Volatility of Interbank Rate in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 37-53, April.
    3. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 22, pages 1-18, April.
    4. Suman Neupane, 2011. "Examining Volatility of Interbank Rate in Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(1), pages 37-53, April.
    5. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 71-91, April.
    6. Nephil Matangi Maskay, Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(2), pages 1-17, October.
    7. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(2), pages 1-17, October.
    8. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(1), pages 71-91, April.
    9. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Macro-Financial Link and Monetary Policy Management: The Case of Nepal," NRB Working Paper 07/2010, Nepal Rastra Bank, Research Department.

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