Modelling interest rate pass-through in Rwanda: is the interest rate dynamics symmetric or asymmetric ?

Rutayisire, Musoni J. (2017): Modelling interest rate pass-through in Rwanda: is the interest rate dynamics symmetric or asymmetric ?

Abstract

The main objective of this paper is to investigate the relationship between the policy-controlled interest rates (Repo and Treasury bill rates) and the bank interest rates (interbank, deposit and lending rates) in Rwanda with the view to empirically examine the size and speed of the interest rate pass-through in the long run and short run and determine whether the pass-through process is symmetric or asymmetric. The empirical results of the paper indicate that the lending rates are cointegrated with none of the selected policy rates; hence the interest rate pass-through has been estimated by means of a transformed ADL model. By contrast, a cointegration relationship has been established between the interbank, deposit and policy rates, hence a non-linear error correction model has been used to detect adjustment process to long-run equilibrium. The estimated long-run as well as the short run interest rate pass-through of the selected policy rates to deposit and lending rates is weak and sluggish. Regarding the adjustment process of the bank rates, empirical results provided evidence that depending on the policy rate, the interbank, deposit and lending rates react differently following a negative and a positive shock in the policy rates. These results have been obtained using cointegration and asymmetric error-correction models. Keywords: Interest rate pass-through, monetary transmission mechanism, asymmetric adjustment. JEL: E430, E520

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest rate pass-through, monetary transmission mechanism, asymmetric adjustment.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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