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

LOGO
Monetary policy transparency
Monetary policy transparency
and pass-through of retail
and pass-through of retail
interest rates
interest rates


Ming-Hua Liu, Dimitri Margaritis, Alireza Tourani-Rad
Ming-Hua Liu, Dimitri Margaritis, Alireza Tourani-Rad
Reporters:
Reporters:
•


Phan Ngọc Chi
Phan Ngọc Chi
•


Đoàn Thị Cẩm Lan
Đoàn Thị Cẩm Lan
•


Cao Xuân Hải
Cao Xuân Hải
•

Nguyễn Ngọc Minh Tuấn
Nguyễn Ngọc Minh Tuấn
Professor:
Professor:
PhD. Trần Ngọc Thơ
PhD. Trần Ngọc Thơ
Contents
INTRODUCTION1
METHODOLOGY2
DATA AND ANALYSIS OF RESULTS3
CONCLUSION4
Contents
INTRODUCTION
1
METHODOLOGY2
DATA AND ANALYSIS OF RESULTS3
CONCLUSION4
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.
Contents
INTRODUCTION1
METHODOLOGY
2
DATA AND ANALYSIS OF RESULTS3
CONCLUSION4
2. METHODOLOGY
The long-term relationship between the retail
interest rate and the benchmark market rate:
Y
t
= α
0
+ α
1
*x
t
+ ε
t
(1)
Where:
Y
t
:the bank lending or deposit rate

x
t
: the corressponding policy or money market rate
α
0
and α
1
are the long- run parameters
ε
t
: Is the error term
2. METHODOLOGY
Y
t
= α
0
+ α
1
*x
t
+ ε
t
(1)

The long-run pass-through is complete if α
1
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 α
1
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 u
t
= [u
1t,
u
2t
] 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 U
1t
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 u
1t
and u
2t
are correlated. (Examine: The
ariance covariance Matrix).
2. METHODOLOGY


=> If u
1t
and u
2t
are correlated, one can alleviate
the problems by augmenting the regression with
leads and lags of the first difference in  x
t
,
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. β
0
measures the contemporaneous or impact pass-
through rate.
βi and γ
i
are dynamic adjustment coefficients.
δ 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.
MAL = (β
0
– 1)/δ (3)
For complete pass-through from market rates to retail rates.
The MAL is simply the weighted average of all lags and it is
a measure of the speed with which retails rates respond to
movements in policy or money ADL market rates.
2. METHODOLOGY
To test for the existence of asymmetric adjustments in
the retail rates in New Zealand, we add a dummy
variable, λ, to Eq. (2). λ is equal to one if the residual,
^e
t-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, λ, to Eq. (2). λ is equal to one if the residual,
^e
t-1
, is positive and 0 otherwise.
where δ

2
captures the error correction adjustment
speed when the rates are above their equilibrium
values and δ
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
+
= (β
0
– 1)/δ
2
(5)
MAL
- =
(β
0
– 1)/δ
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.
Contents
INTRODUCTION1
METHODOLOGY2
DATA AND ANALYSIS OF RESULTS
3
CONCLUSION4
3. Data and analysis of results

3.1. Data
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

3.2. Long-term pass-through and
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

3.2. Long-term pass-through and structural change
3. Data and analysis of results

3.2. Long-term pass-through and
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 pass-
through for the floating rate, base lending rate and 6-
month deposit rate increased, but that for the fixed 1-5
year mortgage rates either did not change significantly or
decreased.
3. Data and analysis of results

3.2. Long-term pass-through and structural change
3. Data and analysis of results

3.2. Long-term pass-through and
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

3.3. Short-term pass-through and
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

3.3. Short-term pass-through and
adjustment speed


Significant change in the adjustment speed after the
OCR only for the base rate and the time deposit rate.

For most retail rates, the estimated size of the short-
term pass-through and mean adjustment lag indicate
speedier response compared to the rates reported in
other countries.