Monetary policy transparency and pass-through of retail interest rates
This paper examines the degree of pass-through and adjustment speed of retail interest rates in response to changes in benchmark market rates in New Zealand during the period 1994-2004. We consider the effects of policy transparency and financial structure of the monetary transmission mechanism. New Zealand is the first OECD country to adopt a full-fledged inflation targeting regime with specific accountability and transparency provisions. Policy transparency was further enhanced by a shift from quantity (settlement cash) to price (interest rate) operating targets in 1999. Using Phillips-Loretan estimates of cointegrating regressions we find complete long-term pass-through for some but not all retail rates. Our results also show that the introduction of the Official Cash Rate (OCR) increased the pass-through of floating and deposit rates but not fixed mortgage rates. In line with previous studies we find the immediate pass-through of market interest rates to bank retail rates to be incomplete. Although we find no statistical evidence for asymmetric response of retail rates to changes in market rates other than for business lending rates in the pre OCR period, differences in the magnitude of mean adjustment lags indicate that banks appear to pass on decreases to fixed mortgage rates faster. Overall, our results confirm that monetary policy rate has more influence on short-term interest rates and that increased transparency has lowered instrument volatility and enhanced the efficacy of policy.
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.:
- Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
- Loretta J. Mester & Anthony Saunders, 1990.
"When does the prime rate change?,"
90-16, Federal Reserve Bank of Philadelphia.
- Ben S. Bernanke & Mark Gertler, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
Journal of Economic Perspectives,
American Economic Association, vol. 9(4), pages 27-48, Fall.
- Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
- 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.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2003.
"Retail Bank Interest Rate Pass-Through: Is Chile Atypical?,"
Working Papers Central Bank of Chile
221, Central Bank of Chile.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2004. "Retail Bank Interest Rate Pass-through: Is Chile Atypical?," 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 5, pages 147-182 Central Bank of Chile.
- Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through; Is Chile Atypical?," IMF Working Papers 03/112, International Monetary Fund.
- Chong, Beng Soon & Liu, Ming-Hua & Shrestha, Keshab, 2006. "Monetary transmission via the administered interest rates channel," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1467-1484, May.
- Anonymous, 1999. "Monetary policy implementation: changes to operating procedures," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
- Altunbas, Yener & Fazylov, Otabek & Molyneux, Philip, 2002. "Evidence on the bank lending channel in Europe," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2093-2110, November.
- Barnhart, Scott W. & McNown, Robert & Wallace, Myles S., 1999. "Non-Informative Tests of the Unbiased Forward Exchange Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 265-291, June.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Nabar, Prafulla G & Park, Sang Yong & Saunders, Anthony, 1993. "Prime Rate Changes: Is There an Advantage in Being First?," The Journal of Business, University of Chicago Press, vol. 66(1), pages 69-92, January.
- Scholnick, Barry, 1996. "Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 485-496, June.
- 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.
- 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.
- Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
- Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
- Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:501-511. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.