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Interest rate pass-through: a nonlinear vector error-correction approach

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  • Popiel, Michal

Abstract

This paper analyzes pass-through from money market rates to consumer retail loan and deposit rates in Canada from 1983 to 2015 using a nonlinear vector error- correction model. This model permits estimation of long-run pass-through coeffcients while simultaneously accounting for asymmetric adjustments and short-run dynamics. In contrast to empirical frameworks used in previous studies, it also allows testing of commonly made assumptions such as exogeneity of the market rate, making inference more robust. I find that pass-through was complete for all rates before the financial crisis although only after the mid 1990s for the 1 year mortgage rate. Since the end of the 2008{09 recession, pass-through remains complete in the mortgage market but has significantly declined for deposit rates. Furthermore, many rates adjust asymmetrically but the direction of rigidity differs among rates and time periods.

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  • Popiel, Michal, 2016. "Interest rate pass-through: a nonlinear vector error-correction approach," Queen's Economics Department Working Papers 274678, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274678
    DOI: 10.22004/ag.econ.274678
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    Cited by:

    1. Afsin Sahin, 2019. "Loom of Symmetric Pass-Through," Economies, MDPI, vol. 7(1), pages 1-25, February.

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