Interest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target period
AbstractThis study examines the long-run interest rate pass through of the federal funds rate to the prime rate and whether there is asymmetric adjustment in the prime rate using the Enders-Siklos (2001) momentum threshold autoregressive model over the period February 1987 to October 2005. Once allowance is made for the endogenously determined structural break in the cointegrating relationship in April 1996, the adjustment of the prime rate to changes in the federal funds rate appears asymmetric with upward rigidity, a result contrary to previous studies which found that the prime rate exhibits downward rigidity. The finding of upward rigidity in the prime rate lends support for the customer reaction and adverse selection hypotheses. Moreover, the empirical evidence seems to support the observation of increased pass through as a result of heightened competition in the banking industry as well as the Federal Reserve's enhanced transparency in monetary policy during the 1990s.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics.
Volume (Year): 40 (2008)
Issue (Month): 11 ()
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- Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
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