The Policy Interest-Rate Pass-Through in Central America

By Stephanie Medina Cas, Alejandro Carrion-Menendez, Florencia Frantischek

October 1, 2011

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Format: Chicago

Stephanie Medina Cas, Alejandro Carrion-Menendez, and Florencia Frantischek. The Policy Interest-Rate Pass-Through in Central America, (USA: International Monetary Fund, 2011) accessed September 19, 2024

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

Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.

Subject: Bank credit, Banking, Central bank policy rate, Deposit rates, Exchange rate flexibility, Financial services, Foreign exchange, Inflation targeting, Monetary policy, Monetary policy frameworks

Keywords: Bank concentration, Central America, Central bank policy rate, Deposit rates, Exchange rate, Exchange rate flexibility, Financial sector, Inflation targeting, Interest rate, Interest rate pass-through, Interest rate transmission mechanism, Interest-rate transmission, Latin America, Lending pass-through Cummulative response, Monetary policy, Monetary policy frameworks, Policy rate, Rate, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/240
Stock No:

WPIEA2011240
ISBN:

9781463923228
ISSN:

1018-5941

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