paper 03_nhom 09_tcqt chk23_monetary policy - retail rates (1).ppt

5/20/2018 PAPER 03_NHOM 09_TCQT CHK23_Monetary Policy - Retail Rates (1).ppt

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LOGO

Monetary policy transparencyand pass-through of retailinterest rates

Ming-Hua Liu, Dimitri Margaritis, Alireza Tourani-Rad

Reporters:

Phan NgcChionThCmLanCao Xun HiNguynNgcMinh Tun

Professor:

PhD. TrnNgcTh


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Contents

INTRODUCTION1

METHODOLOGY2

DATA AND ANALYSIS OF RESULTS3

CONCLUSION4


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Contents

INTRODUCTION1

METHODOLOGY2


CONCLUSION4


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1. INTRODUTION

1.1. Introdution.


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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.


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Contents

INTRODUCTION1

METHODOLOGY2


CONCLUSION4


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2. METHODOLOGY

The long-term relationship between the retail

interest rate and the benchmark market rate:

Yt= 0+ 1*xt+ t (1)

Where:

Yt:the bank lending or deposit rate

xt: the corressponding policy or money market rate

0and 1are the long- run parameters

t : Is the error term


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2. METHODOLOGY

Yt=

0+

1*x

t+

t(1)

The long-run pass-through is complete if 1 is

statistically not different from one.

If the demand for retail bank products is not fullyelastic or if banks can exert some degree of market

power then 1will be expected to be less than one.


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2. METHODOLOGY

The problemwith the Engle-Granger method:

The two non -stat ionary interest rate series cointegrate.

OLS estimates of EQ (1) do not h ave standard

asym ptot ic dist r ibut ions.

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.


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This Phillips and Loretan (1991) method is well suited to

the estimation of long-run relationships involvingintegrated variables, especially in situations wherethere is a clear distinction between the responsevariable (e.g., retail bank rate) and its determinant(viz., money market rate) in the cointegrating

relationship and the dynamics of Xtplay an importantrole in the DGP for Yt. It is modeled by the followingtriangular system of equations:

yt= 0+1* xt+ u1t, t = 1, 2, T, (1a)

xt= xt-1+ u2t (1b)

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

2. METHODOLOGY


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yt= 0+1* xt+ u1t, t = 1, 2, T, (1a)xt= xt-1+ u2t (1b)

If U1tis not stationary then the two interest rateswill not cointegrate and the relationship will bespurious and tets will not be valid.

OLS estimates of (1) or (1a) will not have astandard distribution even in very large sampleswhen u1tand u2tare correlated. (Examine: Theariance covariance Matrix).

2. METHODOLOGY

=> If u1tand u2tare correlated, one can alleviatethe problems by augmenting the regression withleads and lags of the first difference in xt,


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2. METHODOLOGY

The inclusion of two-sided lag differences eliminates the

endogeneity problem, while the autocorrelation problem mayneed 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


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2. METHODOLOGY

Vtis the error term. 0measures the contemporaneous or impact pass-

through rate.

i and iare dynamic adjustment coefficients.

captures the error correction adjustmentspeed when the rates are

away from their equilibrium level.

The error-correction (ECM) representationcorresponding 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 employa structural error-correction model that explicitly accounts for

the contemporaneous effect of changes in money market rates

on retail bank rates.


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2. METHODOLOGY

The mean adjustment lag (MAL) of a complete passthrough

for a general ADL(p,q) model or its equivalent ECMparameterization.

MAL = (01)/ (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 tomovements in policy or money ADL market rates.


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2. METHODOLOGY

To test for the existence of asymmetric adjustments in

the retail rates in New Zealand, we add a dummyvariable, , 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 dummyvariable, , 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 equilibriumvalues and 3 captures the error correction

adjustment speed when the rates are below their

equilibrium values.


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2. METHODOLOGY

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

complete pass-through.

MAL+ = (01)/2 (5)

MAL- = (01)/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.


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Contents

INTRODUCTION1

METHODOLOGY2


CONCLUSION4


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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 ratefrom Reserve Bank.


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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.


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3.2. Long-term pass-through and structural change


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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.


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structural change

The reasons are:

Due to less interest rate volatility, more transparency and

competition in marketplaceincrease 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.


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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.


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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.


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3.4. Asymmetric adjustment speed

The differences in the magnitude of mean adjustmentlags 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.


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3. Data and analysis of results 3.4. Asymmetric adjustment speed


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Contents

INTRODUCTION1

METHODOLOGY2


CONCLUSION4


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4. CONCLUSION 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 theadjustment of retail rates.

The introduction of OCR is associated with an increase in

the pass-through for floating, base lending and depositrates but not for fixed mortgage rates.


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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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