Interest rate pass-through in Turkey during the period of unconventional interest rate corridor

Serçin ŞAHİN; Serkan ÇİÇEK; Serçin ŞAHİN; Serkan ÇİÇEK

doi:10.3934/QFE.2018.4.837

Quantitative Finance and Economics

2018, Volume 2, Issue 4: 837-859. doi: 10.3934/QFE.2018.4.837

Previous Article Next Article

Research article

Interest rate pass-through in Turkey during the period of unconventional interest rate corridor

Serçin ŞAHİN ¹,
Serkan ÇİÇEK ^{2
,
,}

1.
Department of Economics, Yildiz Technical University, 34220-Davutpaşa, İstanbul, Turkey
2.
Department of Economics and Finance, Mugla Sitki Kocman University, 48300-Fethiye, Mugla, Turkey

Received: 05 September 2018 Accepted: 10 October 2018 Published: 09 November 2018
JEL Codes: E52, E58

After adopting new monetary policy framework at the end of 2010, the Central Bank of the Republic of Turkey (CBRT) started actively using both multiple short-term policy rates and funding composition over the banks in order to manage the liquidity requirement of the banking system. In this regard, this paper examines interest rate pass-through from multiple policy rates to the retail rates in Turkey and explores asymmetries in the adjustment process within the framework of an asymmetric ARDL model developed by Shin et al. (2014). Our findings revealed that both the CBRT average funding rate and interbank repo rate play an important role rather than official policy rates (weekly repo rate, overnight lending rate, overnight borrowing rate, and late liquidity rate) in this new policy framework. Our results also captured greater pass-through to the interest rate of commercial loans than the interest rate of consumer loans and banking deposits. Moreover, all retail rates respond faster to policy rate cuts than hikes, indicating that the banks were reluctant to raise interest rates than to decrease during the period under investigation.
- asymmetry,
- interest rate pass-through,
- non-linear autoregressive distributed lag
Citation: Serçin ŞAHİN, Serkan ÇİÇEK. Interest rate pass-through in Turkey during the period of unconventional interest rate corridor[J]. Quantitative Finance and Economics, 2018, 2(4): 837-859. doi: 10.3934/QFE.2018.4.837

Related Papers:

Abstract

After adopting new monetary policy framework at the end of 2010, the Central Bank of the Republic of Turkey (CBRT) started actively using both multiple short-term policy rates and funding composition over the banks in order to manage the liquidity requirement of the banking system. In this regard, this paper examines interest rate pass-through from multiple policy rates to the retail rates in Turkey and explores asymmetries in the adjustment process within the framework of an asymmetric ARDL model developed by Shin et al. (2014). Our findings revealed that both the CBRT average funding rate and interbank repo rate play an important role rather than official policy rates (weekly repo rate, overnight lending rate, overnight borrowing rate, and late liquidity rate) in this new policy framework. Our results also captured greater pass-through to the interest rate of commercial loans than the interest rate of consumer loans and banking deposits. Moreover, all retail rates respond faster to policy rate cuts than hikes, indicating that the banks were reluctant to raise interest rates than to decrease during the period under investigation.

References

[1]	Akar C, Cicek S (2016) "New" monetary policy instruments and exchange rate volatility. Empirica 43: 141–165. doi: 10.1007/s10663-015-9298-y
[2]	Apergis N, Cooray A (2015) Asymmetric interest rate pass-through in the U.S., the U.K. and Australia: New evidence from selected individual banks. J Macroecon 45: 155–172.
[3]	Aristei D, Gallo M (2014) Interest rate pass-through in the Euro area during the financial crisis: A multivariate regime-switching approach. J Policy Model 36: 273–295. doi: 10.1016/j.jpolmod.2013.12.002
[4]	Aydin H İ (2007) Interest Rate Pass-Through in Turkey June 2007. The Central Bank of the Republic of Turkey Research and Monetary Policy Department Working Paper, No: 07/05.
[5]	BIBLIOGRAPHY \l 1055 Binici M, Kara H, Özlü P (2016) Unconventional Interest Rate Corridor and the Monetary Transmission: Evidence from Turkey CBRT Working Paper, 1–36.
[6]	Borio C E V, Fritz W (1995) The Response of Short-term Bank Lending Rates to Policy Rates: A Cross-Country Perspective. Bank For International Settlements Monetary and Economic Department Working Paper, No:27.
[7]	Bredin D, Fitzpatrick T, O Reilly G (2002) Retail Interest Rate Pass-Through: The Irish Experience. The Econ and Social Rev 33: 223–246.
[8]	Burgstaller J (2005) Interest Rate Pass-Through Estimates From Vector Autoregressive Models. Johannes Kepler University of Linz Department of Economics Working Paper, No: 0510.
[9]	Cavusoglu F (2010) Para Politikası Faiz Oranlarından Mevduat ve Kredi Faiz Oranlarına Geçişkenlik: Türkiye Örneği. Unpublished Thesis Submitted to The Central Bank of the Republic of Turkey.
[10]	Cottarelli C, Kourelis A (1994) Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy. International Monetary Fund Working Papers, WP/94/39.
[11]	De Bondt G J (2005) Interest Rate Pass-Through: Empirical Results for the Euro Area. Ger Econ Rev 6: 37–78. doi: 10.1111/j.1465-6485.2005.00121.x
[12]	De Graeve F, De Jonghe O, Vennet R Vander (2007) Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets. J Bank Financ 31: 259–278. doi: 10.1016/j.jbankfin.2006.03.003
[13]	Deger O (2012) A Comparative Study For Nonlinear Structure of The Interest Rate Pass-Through. Unpublished Graduate Thesis Submitted to Middle East Technical University, The Graduate School of Social Sciences.
[14]	Égert B, Crespo-Cuaresma J, Reininger T (2007) Interest rate pass-through in central and Eastern Europe: Reborn from ashes merely to pass away? J Policy Model 29: 209–225. doi: 10.1016/j.jpolmod.2007.01.005
[15]	Égert B, MacDonald R (2009) Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable. J Econ Surv 23: 277–327.
[16]	Fuertes A-M, Heffernan S, Kalotychou E (2010) How do UK Banks React to Changing Central Bank Rates? J Financ Serv Res 37: 99–130. doi: 10.1007/s10693-009-0056-9
[17]	Gambacorta L, Iannotti S (2007) Are there asymmetries in the response of bank interest rates to monetary shocks? Appl Econ 39: 2503–2517. doi: 10.1080/00036840600707241
[18]	Greenwood-Nimmo M, Shin Y, van Treeck T (2010) The great moderation and the decoupling of monetary policy from long-term rates in the US and Germany (No. 15/2010). IMK Working Paper.
[19]	Heinemann F, Schüler M (2006) Integration Benefits on EU Retail Credit Markets: Evidence From Interest Rate Pass-Through. The Center for European Economic Research ZEW Discussion Papers, No: 02–26.
[20]	Hofmann B, Mizen P (2004) Interest Rate Pass-Through and Monetary Transmission: Evidence from Individual Financial Institutions' Retail Rates. Economica 71: 99–123. doi: 10.1111/j.0013-0427.2004.00359.x
[21]	Hristov N, Hülsewig O, Wollmershäuser T (2014) The interest rate pass-through in the Euro area during the global financial crisis. J Bank Financ 48: 104–119. doi: 10.1016/j.jbankfin.2014.08.004
[22]	Humala A (2005) Interest rate pass-through and financial crises: do switching regimes matter? The case of Argentina. Appl Financ Econ 15: 77–94. doi: 10.1080/0960310042000297908
[23]	Karagiannis S, Panagopoulos Y, Vlamis P (2010) Interest rate pass-through in Europe and the US: Monetary policy after the financial crisis. J Policy Model 32: 323–338. doi: 10.1016/j.jpolmod.2010.02.006
[24]	Lim G C (2001) Bank Interest Rate Adjustments: Are They Asymmetric? Econ Rec 77.
[25]	Liu, M-H, Margaritis D, Tourani-Rad A (2008) Monetary policy transparency and pass-through of retail interest rates. J Bank Financ 32: 501–511. doi: 10.1016/j.jbankfin.2007.06.012
[26]	Mishkin F S (1996) The Channels of Monetary Transmission: Lessons for Monetary Policy. NBER Working Paper 5464.
[27]	Mishkin F S (2001) The Transmission Mechanism and The Role of Asset Prices in Monetary Policy. NBER Working Paper 8617.
[28]	Ozdemir B K (2009). Retail Bank Interest Rate Pass-Through: The Turkish Experience. Inter Res J of Financ and Econ 7–15.
[29]	Panagopoulos Y, Reziti I, Spiliotis A (2010) Monetary and banking policy transmission through interest rates: an empirical application to the USA, Canada, the UK and the Eurozone. Inter Rev of Appl Econ 24: 119–136. doi: 10.1080/02692171003590096
[30]	Papadamou S, Spyromitros E, Kyriazis N A (2018) Quantitative easing effects on commercial bank liability and government yields in UK: A threshold cointegration approach. Inter Econ and Econ Policy 15: 353–371. doi: 10.1007/s10368-017-0401-7
[31]	Papadamou S, Markopoulos T (2018) Interest rate pass through in a Markov-switching Vector Autoregression model: Evidence from Greek retail bank interest rates. The J of Econ Asymmetries 17: 48–60. doi: 10.1016/j.jeca.2018.03.002
[32]	Payne J E (2006) The response of the conventional mortgage rate to the federal funds rate: symmetric or asymmetric adjustment? Appl Financ Econ Letters 2: 279–284. doi: 10.1080/17446540600647037
[33]	Payne J E, Waters G A (2008) Interest rate pass-through and asymmetric adjustment: evidence from the federal funds rate operating target period. Appl Econ 40: 1355–1362. doi: 10.1080/00036840600806233
[34]	Pesaran M H, Shin Y, Smith R J (2001) Bounds testing approaches to the analysis of level relationships. J of Appl Econ 16: 289–326. doi: 10.1002/jae.616
[35]	Philippas D, Dragomirescu-Gaina C (2013) EMU Sovereign risks: Is the EMU the playground for Asymmetries. J of Econ Asymmetries 10: 21–31. doi: 10.1016/j.jeca.2013.09.001
[36]	Sander H, Kleimeier S (2004) Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration. J Int Money Finan 23: 461–492.
[37]	Shin Y, Yu B, Greenwood-Nimmo M (2014) Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework, In R. C. Sickles, W. C. Horrace, Festschrift in Honor of Peter Schmidt, New York: Springer New York, 281–314.
[38]	Stiglitz J E, Weis A (1981) Credit Rationing in Markets With Imperfect Information. Am Econ Rev 71: 393–410.
[39]	Thompson M A (2006) Asymmetric adjustment in the prime lending–deposit rate spread. Rev of Financ Econ, 15: 323–329. doi: 10.1016/j.rfe.2005.12.002
[40]	Tkacz G (2001) Endogenous thresholds and tests for asymmetry in US prime rate movements. Econ Lett 73.
[41]	Ucak A, Yildirak K (2012) An Alternative Approach to Analyze The Monetary Transmission in Turkey: An Empirical Analysis on Speed of Adjustment. Finansal Araştırmalar ve Çalışmalar.
[42]	Wang KM, Lee YM (2009) Market volatility and retail interest rate pass-through. Econ Model 26: 1270–1282. doi: 10.1016/j.econmod.2009.06.002
[43]	Yildirim D (2013) Asymmetric Interest Rate Pass-Through to Turkish Loan Rates. İktisat İşletme ve Finans 29: 9–28.
[44]	Yu B, Chun S E, Kim J (2013) Some evidence on the asymmetry of interest rate pass-through in Asian economies. Korea and the World Econ, 14: 207–233.
[45]	Yuksel E, Ozcan K M (2013) Interest rate pass-through in Turkey and impact of global financial crisis: asymmetric threshold cointegration analysis. J Bus Econ Manag 14: 98–113.
[46]	Yılmaz AB, Yergin H, Oğrak A (2018) An application on interest rate pass-through in Turkey. Inter J of Humanities and Social Sci 7: 78–83.

Reader Comments

Your name:*

Email:*
© 2018 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)