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Interest Rate Pass-Through in the UK: Has the Transmission Mechanism Changed During the Financial Crisis?

  • A.H. Ahmad
  • Nusrate Aziz
  • Shahina Rummun

Interest rate has been the monetary policy tool used by the modern central banks. For monetary policy to be effective, changes in the policy rate should influence the short-term money market rate and retail rates. Using an error correction methodology, this paper examines the short-run and long-run dynamics of interest rate pass through from the LIBOR to four different UK retail rates. The results indicate that interest rate pass-through in the UK is incomplete in the short run, but fairly complete in the long-run and the adjustment of retail rates depend on whether they are below or above their respective long-run values. The results also indicate a temporary, but statistically significant change in the interest rate pass-through since the beginning of the financial crisis in 2007.

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Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 18 (2013)
Issue (Month): 1 (March)
Pages: 17-38

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Handle: RePEc:eis:articl:113ahmad
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