Monetary Policy and Lending Interest Rates: evidence from Mexico

Whenever the Central Bank modifies its interest rate, it is generally thought that lending interest rates for new loans will follow in a similar fashion independently of the loan size. In this paper we examine this hypothesis by looking at what happened to interest rates for personal and payroll loans of different size when the Central Bank of Mexico varied its reference rate. Using an autoregressive model with distributed lags that incorporates asymmetric effects, we find three major results. First, increases in the reference rate do not have the expected impact on the interest rates for personal and payroll loans. Second, the inclusion of control variables may help explain what appears to be an asymmetric response by banks to changes in the reference rate. Third, variations in the central bank rate may have some distributional impact.