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Retail Bank Interest Rate Pass-through: Is Chile Atypical?

In: Banking Market Structure and Monetary Policy

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Author Info

  • Marco A. Espinosa-Vega

    (International Monetary Fund)

  • Alessandro Rebucci

    (Inter-American Development Bank)

Abstract

This paper investigates empirically the pass-through of money market interest rates to retail banking interest rates in Chile, the United States, Canada, Australia, New Zealand, and five European countries. Overall, Chile’s pass-through does not appear atypical. Based on a standard errorcorrection model, we find that, as in most countries considered, Chile’s measured pass-through is incomplete. But Chile’s pass-through is also faster than in many other countries considered and is comparable to that in the United States. While we find no significant evidence of asymmetry in Chile’s pass-through across states of the interest rate or monetary policy cycle, we do find some evidence of parameter instability, around the time of the Asian and Russian crises. However, we do not find evidence that the switch to a more flexible exchange rate regime in 1999 and the “nominalization” of Chile’s interest rate targets in 2001 have affected significantly the pass-through process.

(This abstract was borrowed from another version of this item.)

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This chapter was published in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Banking Market Structure and Monetary Policy, , chapter 5, pages 147-182, 2004.

This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v07c05pp147-182.

Handle: RePEc:chb:bcchsb:v07c05pp147-182

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  1. David Neumark & Steven A. Sharpe, 1989. "Market structure and the nature of price rigidity: evidence from the market for consumer deposits," Finance and Economics Discussion Series 52, Board of Governors of the Federal Reserve System (U.S.).
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  11. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  12. Solange Berstein & J. Rodrigo Fuentes, 2004. "Is There Lendign Rate Stickiness in the Chilean Banking Industry?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 6, pages 183-210 Central Bank of Chile.
  13. Angeliki Kourelis & Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 94/39, International Monetary Fund.
  14. Felipe Morandé & Matías Tapia, 2002. "Exchange Rate Policy in Chile: From the Band to Floating and Beyond," Working Papers wp192, University of Chile, Department of Economics.
  15. de Bondt, Gabe, 2002. "Retail bank interest rate pass-through: new evidence at the euro area level," Working Paper Series 0136, European Central Bank.
  16. Sebastian Edwards, 1998. "Interest Rate Volatility, Capital Controls, and Contagion," NBER Working Papers 6756, National Bureau of Economic Research, Inc.
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