Assessing the Determinants of Interest Rate Transmission Through Conditional Impulse Response Functions

Author/Editor:

Christian Saborowski ; Sebastian Weber

Publication Date:

January 25, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We employ a structural panel VAR model with interaction terms to identify determinants of effective transmission from central bank policy rates to retail lending rates in a large country sample. The framework allows deriving country specific pass-through estimates broken down into the contributions of structural country characteristics and policies. The findings suggest that industrial economies tend to enjoy a higher pass-through largely on account of their more flexible exchange rate regimes and their more developed financial systems. The average pass-through in our sample increased from 30 to 60 percent between 2003 and 2008, mainly due to positive risk sentiment, rising inflation and increasingly diversified banking sectors. The crisis reversed this trend partly as banks increased precautionary liquidity holdings, non-performing loans proliferated and inflation moderated.

Series:

Working Paper No. 13/23

Subject:

Banking sector Economic models Interest rates Monetary policy Monetary transmission mechanism

English

Publication Date:

January 25, 2013

ISBN/ISSN:

9781475525717/1018-5941

Stock No:

WPIEA2013023

Format:

Paper

Pages:

37

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