A Comparative Study for the Nonlinear Structure of the Interest Rate Pass-Through

Değer O., Yıldırım Kasap D.

9th EBES Conference, Rome, Italy, 11 - 13 January 2013, pp.92-93

  • Publication Type: Conference Paper / Summary Text
  • City: Rome
  • Country: Italy
  • Page Numbers: pp.92-93
  • Middle East Technical University Affiliated: Yes


This study investigates the interest rate pass through from the money market rate to the lending rate by utilizing monthly data of fifteen countries, grouped as high, upper middle and lower middle income, over the period 1999:01-2011:09. Taking the linear cointegration test of Engle-Granger as benchmark, we employ threshold cointegration tests of Enders and Siklos (2001) in order to account for the possible nonlinearities in the pass-through process besides income differences. Empirical results reveal that the pass through process is complete in three countries; Republic of Korea, Latvia and Malaysia and the adjustment of the lending rate is symmetric in two countries; Armenia and Republic of Korea. Moreover, our findings uncover that lending rates exhibit upward rigidity in six countries; Bolivia, Philippines, Malaysia, Dominican Republic, Thailand and Croatia, and downward rigidity in seven countries; Ukraine, Sri Lanka, Latvia, Peru, Kuwait, Hong Kong and Czech Republic. Furthermore, heterogeneities in the pass-through mechanism across countries appear to arise mainly from differences in income level, inflation, market power, financial sector development and market volatility.