Nonlinearities in the Adjustments of Commercial Banks’ Retail Rates to Interbank Rates: The Case of Mauritius
This paper investigates the rigidity in commercial banks’ interest rates in the case of Mauritius using a nonlinear framework. The long-run cointegrating relationships between each of the banks’ retail rates (i.e., deposit and lending rates) and interbank rates are examined using threshold models designed to study nonlinear adjustments. From the Momentum Autoregressive model, the author finds that discrepancies between the lending rate and the interbank rate from their long-run equilibrium level are eliminated rapidly when there are negative shocks to the margin while others are allowed to persist. This indicates that discrepancies exhibit more momentum when they are declining than when they are increasing. In other words, whether interbank rate is increasing or decreasing, lending rates are adjusted more rapidly for decreases in the margin but they are allowed to persist for increases in the margin.
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Volume (Year): III (2005)
Issue (Month): 3 (September)
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