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Interest rate pass-through in Kenya

  • Roseline N. Misati
  • Esman M. Nyamongo
  • Anne W. Kamau
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    Purpose – This study aims to quantitatively measure the size and speed of monetary policy interest rate transmission to long-term interest rates in Kenya. Design/methodology/approach – The study uses autoregressive distributed lag specification re-parameterized as an error correction model and mean adjustment lag methods. Findings – The study finds incomplete pass-through of policy rates both in the short and the long run. The study also shows that it takes approximately between 11 months to two years for policy interest rate to be fully transmitted to long-term rates. Originality/value – The study is novel as it is the first attempt the authors are aware of that empirically investigates the interest rate pass-through in Kenya using high-frequency data. Measuring the speed and size of interest rate pass-through provides policy makers with insights on how long it takes for a particular policy action to yield desired results on the real economy. The findings of this study will therefore inform policy makers of the effectiveness of their policy decisions and facilitate timely monetary policy actions.

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    Article provided by Emerald Group Publishing in its journal International Journal of Development Issues.

    Volume (Year): 10 (2011)
    Issue (Month): 2 (July)
    Pages: 170-182

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    Handle: RePEc:eme:ijdipp:v:10:y:2011:i:2:p:170-182
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    1. Karagiannis, Stelios & Panagopoulos, Yannis & Vlamis, Prodromos, 2010. "Interest rate pass-through in Europe and the US: Monetary policy after the financial crisis," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 323-338, May.
    2. Chionis, Dionysios P. & Leon, Costas A., 2006. "Interest rate transmission in Greece: Did EMU cause a structural break?," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 453-466, May.
    3. Jesús Crespo-Cuaresma & Balázs Égert & Thomas Reininger, 2004. "Interest Rate Pass-Through in New EU Member States: The Case of the Czech Republic, Hungary and Poland," William Davidson Institute Working Papers Series 2004-671, William Davidson Institute at the University of Michigan.
    4. 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.
    5. 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.
    6. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
    7. Egert, Balazs & Crespo-Cuaresma, Jesus & Reininger, Thomas, 2007. "Interest rate pass-through in central and Eastern Europe: Reborn from ashes merely to pass away?," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 209-225.
    8. Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "Bank behavior, incomplete interest rate pass-through, and the cost channel of monetary policy transmission," Economic Modelling, Elsevier, vol. 26(6), pages 1310-1327, November.
    9. Solange Berstein & Rodrigo Fuentes, 2003. "Is There Lending Rate Stickiness in the Chilean Banking Industry?," Working Papers Central Bank of Chile 218, Central Bank of Chile.
    10. Amarasekara, Chandranath, 2005. "Interest Rate Pass-through in Sri Lanka," MPRA Paper 64865, University Library of Munich, Germany.
    11. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
    12. Wang, Kuan-Min & Lee, Yuan-Ming, 2009. "Market volatility and retail interest rate pass-through," Economic Modelling, Elsevier, vol. 26(6), pages 1270-1282, November.
    13. Gerrard, W J & Godfrey, L G, 1998. "Diagnostic Checks for Single-Equation Error-Correction and Autoregressive Distributed Lag Models," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(2), pages 222-37, March.
    14. Rocio Betancourt & Hernando Vargas & Norberto Rodríguez, . "Interest Rate Pass-Through In Colombia: A Micro-Banking Perspective," Borradores de Economia 407, Banco de la Republica de Colombia.
    15. Don Bredin & Trevor Fitzpatrick & Gerard O Reilly, 2002. "Retail Interest Rate Pass-Through - The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 33(2), pages 223-246.
    16. 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.
    17. 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.
    18. Liu, Ming-Hua & Margaritis, Dimitri & Tourani-Rad, Alireza, 2008. "Monetary policy transparency and pass-through of retail interest rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 501-511, April.
    19. Giovanni Ferri & Carlo Cottarelli & Andrea Generale, 1995. "Bank Lending Rates and Financial Structure in Italy: A Case Study," IMF Working Papers 95/38, International Monetary Fund.
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