Thuyết trình tài chính quốc tế Monetary policy transparency and pass-through of retail interest rates

 Examined the short-term pass-through and the adjustment speed of those retail interest rates using a structural error correction model and tested whether the adjustment is symmetric or

Monetary policy transparency

and pass-through of retail

• Cao Xuân Hải

• Nguyễn Ngọc Minh Tuấn Professor:

PhD Trần Ngọc Thơ

1 INTRODUTION

 1.1 Introdution.

1 INTRODUTION

 1.2 Examined the following issues:

 Assess the long-term pass-through of various retail interest rates including mortgage rates of different maturities using the Phillips and Loretan estimator

 Examined the short-term pass-through and the adjustment speed of those retail interest rates using a structural error correction model and tested whether the adjustment is symmetric or asymmetric

 Investigated whether enhanced transparency in monetary policy operating procedures had a significant impact on the pass-through and adjustment speed of interest rates in N.Z

2 METHODOLOGY

The long-term relationship between the retail

interest rate and the benchmark market rate:

Yt = α0 + α1*xxt + εt (1)

Where:

Yt :the bank lending or deposit rate

xt : the corressponding policy or money market rate

α0 and α1 are the long- run parameters

εt : Is the error term

2 METHODOLOGY

Yt = α0 + α1*xxt + εt (1)

 The long-run pass-through is complete if α1 is

statistically not different from one.

 If the demand for retail bank products is not fully

elastic or if banks can exert some degree of market power then α1 will be expected to be less than one

2 METHODOLOGY

 The problem with the Engle-Granger method:

The two non-stationary interest rate series cointegrate OLS estimates of EQ (1) do not have standard

asymptotic distributions.

Estimate EQ (1) using the Phillips and Loretan

(1991) method It has anumber of advantages

The PL estimator is asymtotically unbiased and normally distributed and has been shown to perform well in finite samples.

This Phillips and Loretan (1991) method is well suited to the estimation of long-run relationships involving integrated variables, especially in situations where there

is a clear distinction between the response variable (e.g., retail bank rate) and its determinant (viz., money market rate) in the cointegrating relationship and the dynamics

of X t play an important role in the DGP for Y t It is modeled by the following triangular system of equations:

y t = α 0 +α 1 * x t + u 1t , t = 1, 2, … T, (1a)

x t = x t-1 + u 2t (1b)

Where ut = [u1t,u2t] is a stationary vector

2 METHODOLOGY

y t = α 0 +α 1 * x t + u 1t , t = 1, 2, … T, (1a)

x t = x t-1 + u 2t (1b)

 If U1t is not stationary then the two interest rates will not cointegrate and the relationship will be spurious and tets will not be valid

 OLS estimates of (1) or (1a) will not have a

standard distribution even in very large samples when u1t and u2t are correlated (Examine: The ariance covariance Matrix)

2 METHODOLOGY

 => If u1t and u2t are correlated, one can alleviate the problems by augmenting the regression with leads and lags of the first difference in  xt,

2 METHODOLOGY

The inclusion of two-sided lag differences eliminates the endogeneity problem, while the autocorrelation problem may need to be remedied by including lags of the error correction term Phillips and Loretan (1991) propose to estimate the following equation using (non-linear) least squares:

 Denotes first difference operator

2 METHODOLOGY

V t is the error term 0 measures the contemporaneous or impact through rate.

pass-i and  i are dynamic adjustment coefficients

 captures the error correction adjustmentspeed when the rates are

away from their equilibrium level.

The error-correction (ECM) representation

corresponding to a general ADL(p,q) model is given by:

To analyze the short-run dynamics of interest rate changes in

response to changes in official or money market rates we employ

a structural error-correction model that explicitly accounts for

the contemporaneous effect of changes in money market rates

on retail bank rates

2 METHODOLOGY

The mean adjustment lag (MAL) of a complete passthrough for a general ADL(p,q) model or its equivalent ECM parameterization.

2 METHODOLOGY

To test for the existence of asymmetric adjustments

in the retail rates in New Zealand, we add a dummy variable, , to Eq (2)  is equal to one if the residual,

^et-1, is positive and 0 otherwise.

To test for the existence of asymmetric adjustments

in the retail rates in New Zealand, we add a dummy variable, , to Eq (2)  is equal to one if the residual,

^et-1, is positive and 0 otherwise.

where 2 captures the error correction adjustment speed when the rates are above their equilibrium values and 3 captures the error correction adjustment speed when the rates are below their equilibrium values.

2 METHODOLOGY

For the special case of an ALD(1,1) model under

complete pass-through.

MAL+ = (0 – 1)/2 (5) MAL- = (0 – 1)/3 (6)

MAL+ represents the mean adjustment lag when the retail

interest rates are above their equilibrium value

MAL- represents the mean adjustment lag when the retail

interest rates are below their equilibrium value

3 Data and analysis of results

Monthly series of interest rate data, from two sources:

 The fixed mortgage rates of maturities of 1-5 years – from a major commercial bank.

 The rest of the data: bond rates, base lending rate,

floating mortgage rate, 6-month time deposit rate,

OCR, overnight interbank rate – from Reserve Bank.

3 Data and analysis of results

structural change

 The long-term pass-through from the overnight interbank rate to retail rates is incomplete for all series, except for the floating and fixed 1-year mortgage rates at the 5% level.

 Official and money market interest rates have a much more direct link with short-term rates than with long-term rates.

3 Data and analysis of results

3 Data and analysis of results

structural change

 Prior to the introduction of the OCR in 1999, all long-term degree of pass-through from the market cash rate to retail rates was incomplete

 After the introduction of the OCR, the degree of through for the floating rate, base lending rate and 6-

year mortgage rates either did not change significantly or decreased

3 Data and analysis of results

3 Data and analysis of results

structural change

The reasons are:

 Due to less interest rate volatility, more transparency and

competition in marketplace

 increase in long-term pass-through from overnight interbank rate

to short-term retail rates.

 Banks use bond yields instead of the OCR as the benchmarks to adjust fixed mortgage rates.

 The weak relationship between OCR and fixed mortgage rates.

 Swapping foreign currency debt into fixed or floating domestic

currency swaps and currency swaps.

 The effective cost overseas borrowing is about the same as that of domestic interest rate with same maturity.

3 Data and analysis of results

adjustment speed

 For most retail rates, there are no significant differences in size of the immediate pass-through between the period before and after the introduction of OCR Exceptions:

• Business base lending rate: twofold increase.

• Floating rate: increase four times.

3 Data and analysis of results

short-3 Data and analysis of results

3 Data and analysis of results

 The differences in the magnitude of mean adjustment lags indicate that the pass-through to fixed mortgage rates is faster when retail rates are above their equilibrium values rather than below

 Banks were faster to bring rates down when they were above equilibrium compared to the speed by which they would bring them up when they were below euilibrium levels

3 Data and analysis of results

 3.4 Asymmetric adjustment speed

4 CONCLUSION

 We find complete long-term pass-through and almost complete immediate pass-through from bond rates to fixed rates of similar maturities.

 Monetary policy rate has more influence on short-term interest rates.

 Monetary policy transparency and interest rate volatility decreases, future short-term rate change less uncertain  enhancing the degree of pass-through of offcial rates to retail rates  efficacy of monetary policy.

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