Bernanke, B., and Mark Gertler, 1995, “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, Vol. 9, pp. 27-48.
Bernanke, B., and S. Gilchrist, 1999, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in M. Woodford and J. Taylor (eds.), Handbook of Macroeconomics, Chapter 21.
Berstein S., and R. Fuentes, 2002, “From Policy Rate to Bank Lending Rates: the Chilean Banking Industry,” Paper presented at the Sixth Annual Conference of the Central Bank of Chile, December.
Bondt, G., 2002, “Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level,” Working Paper (Frankfurt: European Central Bank).
Borio, C, and W. Fritz, 1995, “The Response of Short-Term Bank Lending Rates to Policy Rates: A Cross-Country Perspective,” in Financial Structure and the Monetary Transmission Mechanism, (Basel: Bank for International Settlements).
Caballero, Ricardo J., 2000, “Macroeconomic Volatility in Latin America: A View and Three Case Studies,” NBER Working Paper No. 7782 (Cambridge, Massachusetts: National Bureau of Economic Research).
Cottarelli, C, and A. Kourelis, 1994, “Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy,” IMF Staff Papers, Vol. 41, No. 4, pp. 587-623.
Edwards, Sebastian, 1998, “Interest Rate Volatility, Capital Controls and Contagion,” NBER Working Paper No. 6756 (Cambridge, Massachusetts: National Bureau of Economic Research).
Hannan, T., and A. Berger, 1991, “The Rigidity of Prices: Evidence from the Banking Industry,” American Economic Review Vo. 81, pp. 938-45.
Morande F., and M. Tapia, 2002, “Exchange Rate Policy in Chile: From the Band to Floating and Beyond,” Central Bank of Chile Working Paper No. 152.
Mojon, B., 2000, “Financial Structure and the Interest Rate Channel of the ECB Monetary Policy,” ECB Working Paper No. 40 (Frankfurt: European Central Bank).
Neuman, D., and S. Sharpe, 1992, “Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits,” Quarterly Journal of Economics, pp. 657-680.
Sarno, L., and D. Thornton, 2002, “The Dynamic Relationship Between the Federal Funds Rate and the Treasury Bill Rate: An Empirical Investigation,” Journal of Banking and Finance 666, forthcoming (2002).
Paper prepared for the Sixth Annual Conference of the Central Bank of Chile, and will be published in the conference proceedings. We are grateful to Pablo Garcia, our discussant at the conference, Rodrigo Fuentes, Alain Ize, Saul Lizondo, Steve Phillips, Solange Berstein, Veronica Mies, Klaus Schmidt--Hebbel, Luis Oscar Herrera, and seminar participants at the Central Bank of Chile for useful discussions and comments. Andy Swiston provided outstanding research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy, or those of the Central Bank of Chile. Remaining errors are ours. Corresponding author: Marco Espinosa (email@example.com).
Note that the pass--through from policy interest rates to retail banking rates may still be incomplete if the pass--through from policy rates to government bond yields is incomplete.
See Berstein and Fuentes et al. (2003) for a complementary analysis using Chilean bank--by--bank data.
By using the prime lending rate for Canada, and particularly the United States, we might be biasing the cross--country comparison against all other countries. As we shall see, in fact, these are among the very few interest rate series displaying full pass--through in the long run. The prime rate is a lending rate applied to the best borrowers. It usually moves immediately following policy announcements to signal banks’ readiness to move their pricing schedule, but it does not necessarily move one--to--one with the policy rate. Therefore, it is not evident that pass--through should be complete in the long--run for prime rates.
We do not use short--term deposit rates for Belgium, France, and the Netherlands, even though they are available, because they do not appear market--determined.
The regression includes a constant, a linear trend, and a variable number of lags between one and five. These results are not reported in the paper, but are available from the authors on request (as well as all other result not reported in the paper).
Since we can reject the null hypothesis of unit root in the Chilean interest rate series, co--integration tests would not be informative on the degree of co--movement between the money market interest rate and retail bank rates.
As noted, all Chilean interest series are stationary, while most non--Chilean series appear to have a unit root. Therefore, in the case of Chile, it would be pointless to investigate the presence of co--integration between the money market and retail interest rates. For the other countries, we find that a standard ADF test on the estimated long--run relation (RtailR–β0–β1t–β2MMR) rejects the null of unit root in most cases. This suggests the presence of co--integration in the vast majority of the cases analyzed.
The reported estimate for Europe is an average of the individual country estimates. As known in the literature on dynamic panel data models (e.g., Pesaran and Smith, 1995), such an average may yield a consistent estimate of the typical relation in the cross section. Indeed, its efficiency may be questioned in this case given the small number of country estimates available, but such an averaging is statistically legitimate and economically sensible.
It is worth pointing out that for short maturity interest rates in Chile, the mean lag is less than a month. It follows that one should not expect a statistically significant difference between the short run and the long run pass--through coefficient estimates.
This interpretation is consistent with the observation of Cottarelli and Kourelis (1994) that reducing the fluctuations in money market rates could help enhance the size of pass--through, although they tie a reduction in the money market rate volatility to structural regulatory changes, rather than external shocks.
This variable, called “forward” (backward) dummy in Figure 8, is equal one if the next (or previous) policy change is and interest rate target decrease. This approach is similar to the one used by Mojon (2000), who identifies interest rate cycles directly by inspecting plots of retail interest rates. We also considered the possibility of disentangling the impact of die banking structure on the pass--through by comparing the response of retail banking rates with that of market interest rates of similar maturities. However, data availability prevented us from carrying out this type of analysis.
Note that those estimates of the long--run pass--through based on the shortest sample period appearing equal to zero result from an estimated α4 of the equal size but opposite sign than α2; thus, annihilating the term (α2 + α4) and hence also the long--term pass--through. These are cases in which a different, possibly even shorter, lag--length would likely be appropriate (say including only contemporaneous variables).