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 [...]... 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. .. Long-term pass-through of retail rates varies across financial products  Short-term rates show higher degree of pass-through and faster adjustment speed than long-term rates  There is some evidence of an asymmetric in the adjustment of retail rates  The introduction of OCR is associated with an increase in the pass-through for floating, base lending and deposit rates but not for fixed mortgage rates. .. 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 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... 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. .. estimated size of the shortterm pass-through and mean adjustment lag indicate speedier response compared to the rates reported in other countries 3 Data and analysis of results  3.2 Long-term pass-through and structural change 3 Data and analysis of results  3.4 Asymmetric adjustment speed  The differences in the magnitude of mean adjustment lags indicate that the pass-through to fixed mortgage rates is... the rates are away from their equilibrium level 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. .. 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... 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, ... 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 passthrough for the floating rate, base lending rate and 6month deposit rate increased, but that for the fixed 1-5 year mortgage rates either did not change . 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. 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. 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