A threshold cointegration analysis of interest rate pass-through to UK mortgage rates
This paper empirically analyses the interest rate transmission mechanism in the United Kingdom by exploring the pass-through of the official rate to the money market rate and of the market rate to the mortgage rate. Potential asymmetries, due to financial market conditions and monetary policy, lead to the use of a nonlinear threshold error-correction model, with hypothesis tests based on nonstandard bootstrap procedures that take into account the discrete nature of changes in the official rate. The empirical results indicate the presence of substantial asymmetries in both steps of the process, with these asymmetries depending on past changes in the money market rate and whether these are motivated by official rate changes. Generalized impulse response function analysis shows that adjustments differ with regard to the sign and magnitude of interest rate changes in a way that is consistent with conditions in the interbank and mortgage markets over the recent period.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boris Hofmann & Paul Mizen, 2004. "Interest Rate Pass-Through and Monetary Transmission: Evidence from Individual Financial Institutions' Retail Rates," Economica, London School of Economics and Political Science, vol. 71, pages 99-123, 02.
- Enders, Walter & Siklos, Pierre L, 2001.
"Cointegration and Threshold Adjustment,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 19(2), pages 166-76, April.
- Tom Doan, . "RATS programs to replicate Enders-Siklos(2001) JBES paper on threshold cointegration," Statistical Software Components RTZ00053, Boston College Department of Economics.
- Tom Doan, . "ENDERSIKLOS: RATS procedure to perform Enders-Siklos test for cointegration with threshold effect," Statistical Software Components RTS00064, Boston College Department of Economics.
- Kenneth N. Kuttner, 2000.
"Monetary policy surprises and interest rates: evidence from the Fed funds futures markets,"
99, Federal Reserve Bank of New York.
- Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
- Sander Harald & Kleimeier Stefanie, 2003.
"Convergence in Eurozone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration,"
051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April.
- Sarno, Lucio & Thornton, Daniel L, 2002.
"The Dynamic Relationship Between the Federal Funds rate and the Treasury Bill Rate: An Empirical Investigation,"
CEPR Discussion Papers
3225, C.E.P.R. Discussion Papers.
- Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
- Lucio Sarno & Daniel L. Thornton, 2002. "The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation," Working Papers 2000-032, Federal Reserve Bank of St. Louis.
- Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998.
" Inference in Cointegrating Models: UK M1 Revisited,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 12(5), pages 533-72, December.
- Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-572, December.
- Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
- Gabe J. de Bondt, 2005. "Interest Rate Pass-Through: Empirical Results for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 37-78, 02.
- de Bondt, Gabe & Mojon, Benoît & Valla, Natacha, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series 0518, European Central Bank.
- Corvoisier, Sandrine & Gropp, Reint, 2001.
"Bank Concentration and Retail Interest Rates,"
Working Paper Series
0072, European Central Bank.
- 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.).
- Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May.
- Heffernan, Shelagh A, 1997. "Modelling British Interest Rate Adjustment: An Error Correction Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 211-31, May.
- Johann Burgstaller, 2005. "Interest rate pass-through estimates from vector autoregressive models," Economics working papers 2005-10, Department of Economics, Johannes Kepler University Linz, Austria.
- Hansen, Bruce E. & Seo, Byeongseon, 2002.
"Testing for two-regime threshold cointegration in vector error-correction models,"
Journal of Econometrics,
Elsevier, vol. 110(2), pages 293-318, October.
- Tom Doan, . "RATS programs to replicate Hansen/Seo paper on threshold cointegration," Statistical Software Components RTZ00092, Boston College Department of Economics.
- Joanna Paisley, 1994. "A Model of Building Society Interest Rate Setting," Bank of England working papers 22, Bank of England.
- Luca Benati, 2003.
"Evolving Post-World War II U.K. Economic Performance,"
Computing in Economics and Finance 2003
171, Society for Computational Economics.
- Luca Benati, 2004. "Evolving post-World War II UK economic performance," Bank of England working papers 232, Bank of England.
- Mehtap Kesriyeli & Denise R. Osborn & Marianne Sensier, 2004.
"Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany,"
0414, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- M Kesriyeli & D R Osborn & M Sensier, 2004. "Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany," Centre for Growth and Business Cycle Research Discussion Paper Series 44, Economics, The Univeristy of Manchester.
- Balke, Nathan S & Fomby, Thomas B, 1997.
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
- Tom Doan, . "RATS programs to replicate Balke-Fomby threshold cointegration," Statistical Software Components RTZ00010, Boston College Department of Economics.
- Nathan S. Balke & Thomas B. Fomby, 1992. "Threshold cointegration," Research Paper 9209, Federal Reserve Bank of Dallas.
- James Payne, 2007. "Interest rate pass through and asymmetries in adjustable rate mortgages," Applied Financial Economics, Taylor & Francis Journals, vol. 17(17), pages 1369-1376.
- Ana-Maria Fuertes & Shelagh Heffernan & Elena Kalotychou, 2010. "How do UK Banks React to Changing Central Bank Rates?," Journal of Financial Services Research, Springer, vol. 37(2), pages 99-130, June.
- Hansen Bruce E., 1997.
"Inference in TAR Models,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 2(1), pages 1-16, April.
- Tom Doan, . "THRESHTEST: RATS procedure to perform Hansen's Test for Threshold Break," Statistical Software Components RTS00210, Boston College Department of Economics.
- Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
- Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
- Alberto Humala, 2005. "Interest rate pass-through and financial crises: do switching regimes matter? the case of Argentina," Applied Financial Economics, Taylor & Francis Journals, vol. 15(2), pages 77-94.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2504-2513. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.