Monetary Policy Transparency and Pass-Through of Retail Interest Rates

Posted: 7 Aug 2007

See all articles by Ming-Hua Liu

Ming-Hua Liu

affiliation not provided to SSRN

Dimitri Margaritis

Waikato Management School - Department of Economics; Auckland University of Technology - Faculty of Business & Law

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Date Written: January 2007

Abstract

This paper examines the degree of pass-through and adjustment speed of retail interest rates in response to changes in benchmark market rates in New Zealand during the period 1994 to 2004. We consider the effects of policy transparency and financial structure of the monetary transmission mechanism. New Zealand is the first OECD country to adopt a full-fledged inflation targeting regime with specific accountability and transparency provisions. Policy transparency was further enhanced by a shift from quantity (settlement cash) to price (interest rate) operating targets in 1999. We find complete long-term pass-through for some but not all retail rates. Our results also show that the introduction of the Official Cash Rate (OCR) increased the pass-through of floating and deposit rates but not fixed mortgage rates. In line with previous studies we find the immediate pass-through of market interest rates to bank retail rates to be incomplete. We find no evidence for asymmetric response of retail rates to changes in market rates other than for business lending rates in the pre OCR period. Overall, our results confirm that monetary policy rate has more influence on short-term interest rates and that increased transparency has lowered instrument volatility and enhanced the efficacy of policy.

Keywords: Monetary Policy, Transmission Mechanism, Interest Rate Pass-through

JEL Classification: E43

Suggested Citation

Liu, Ming-Hua and Margaritis, Dimitri and Margaritis, Dimitri and Tourani-Rad, Alireza, Monetary Policy Transparency and Pass-Through of Retail Interest Rates (January 2007). Available at SSRN: https://ssrn.com/abstract=1005022 or http://dx.doi.org/10.2139/ssrn.1005022

Ming-Hua Liu

affiliation not provided to SSRN

Dimitri Margaritis

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020, Auckland 1010
New Zealand

Waikato Management School - Department of Economics ( email )

Private Bag 3105
Hamilton
New Zealand
(64 7) 838 4454 (Phone)

HOME PAGE: http://dimitri@mngt.waikato.ac.nz/school/staff/staffhome.asp?ident=10803+++++&user=DIMITRI

Alireza Tourani-Rad (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020, Auckland 1010
New Zealand

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