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Smoothing the Key Rate Pass-Through: What to Keep in Mind When Interpreting Econometric Estimates

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  • Henry Penikas

    (Bank of Russia)

Abstract

In 2023, the Bank of Russia plans to summarise the results of its Monetary Policy Review (MPR). One of the tasks to be accomplished as part of the MPR is to determine how effectively (quickly and fully) changes in the key rate are translated into credit and deposit rates. While it is common in academic literature around the world to note the lack of effectiveness of the key rate pass-through, this paper clearly shows that this conclusion is the result of an incomplete and incorrect understanding of the functioning of banks and the economy, as well as of an incorrect interpretation of the estimates of econometric models. To demonstrate this claim, this paper provides a review of more than 60 studies published since 2000 and considers examples of estimates of the pass-through using artificial and actual data.

Suggested Citation

  • Henry Penikas, 2023. "Smoothing the Key Rate Pass-Through: What to Keep in Mind When Interpreting Econometric Estimates," Russian Journal of Money and Finance, Bank of Russia, vol. 82(3), pages 3-34, September.
    • Handle: RePEc:bkr:journl:v:82:y:2023:i:3:p:3-34
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    References listed on IDEAS

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    More about this item

    Keywords

    ECM; ARDL; IRPT; MPR; key rate; monetary policy; Russia; inflation targeting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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