Testing the Threshold Asymmetric Co-integration Interest Rate Pass-Through in the Presence of Stylised Properties: Evidence from Pakistan

Farrukh Mahmood, Muhammad Zakaria

Abstract


The study examines the existence of interest rate pass-through
between retail interest rates and policy rates in Pakistan using monthly
data from January 2004 to March 2017. Both retail interest rates and
policy rates follow stylised properties of financial time series.
Therefore, the EC-E-GARCH-M model is used to estimate the interest rate
pass-through between retail and policy rates as suggested by Wang and
Lee (2009). Empirically, there is an incomplete pass-through from policy
rates to retail interest rates, which is 73 percent basic points. This
rate of pass-through is higher compared to previous studies for
Pakistan. The results also highlight that there is an upward rigidity in
the deposit rate model. JEL Classifications: C22, C58, Keywords:
EC-E-GARCH-M Model, Interest Rate Pass-Through, Stylised Properties,
Threshold Asymmetric Cointegration, Rigidities

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DOI: https://doi.org/10.30541/v60i1pp.17-26

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