Interest Rate Pass-Through and Consumption Response: The Deposit Channel

2020 ◽  
pp. 1-45 ◽  
Author(s):  
Sumit Agarwal ◽  
Souphala Chomsisengphet ◽  
Yildiray Yildirim ◽  
Jian Zhang
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Household Consumption ◽  
Difference In Difference ◽  
Demographic Difference ◽  
Standard Difference ◽  
Pass Through ◽  
Financial Transactions ◽  
Interest Rate Shock ◽  
Debt Payment

This study assesses a new mechanism — the deposit channel — in the transmission of interest rate shock to household consumption using an administrative panel dataset of financial transactions for Turkey. Our empirical strategy exploits variation in consumer's adherence to the Muslim laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, and exchange rate, the demographic difference can hardly fully account for the documented consumption response heterogeneity.

scholarly journals MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA

2011 ◽  
Vol 13 (4) ◽  
pp. 435-468
Author(s):  
Akhis R. Hutabarat
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Risk Premium ◽  
Nominal Exchange Rate ◽  
Monetary Transmission ◽  
Cost Channel ◽  
Long Run ◽  
Pass Through ◽  
Exchange Rate Pass Through

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.Keywords: Exchange rate, Balance of Payment, Monetary transmission and policy, Dynamic General Equilibrium.JEL Classification: F41; E52; D58

scholarly journals Monetary and exchange rate regimes changes: The cases of Poland, Czech Republic, Slovakia and Republic of Serbia

2009 ◽  
Vol 56 (2) ◽  
pp. 199-226 ◽  
Author(s):  
Kosta Josifidis ◽  
Jean-Pierre Allegret ◽  
Emilija Beker-Pucar
Keyword(s):  
Exchange Rate ◽  
Czech Republic ◽  
Interest Rate ◽  
Transition Economies ◽  
Inflation Targeting ◽  
Exchange Rate Regimes ◽  
Flexible Exchange Rate ◽  
The Exchange Rate ◽  
The Republic ◽  
Pass Through

The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e. exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.

scholarly journals Loom of Symmetric Pass-Through

Economies ◽  
2019 ◽  
Vol 7 (1) ◽  
pp. 11
Author(s):  
Afsin Sahin
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Stock Prices ◽  
Real Interest Rate ◽  
Deposit Rate ◽  
The Real ◽  
Lending Rate ◽  
Lending Rates ◽  
Pass Through

This paper analyzes the effects of the real policy interest rate on the banking sector lending rate, the deposit rate, real stock prices, and the real exchange rate using the Engle Granger cointegration method (EG), the vector error-correction model (VECM), and the nonlinear vector error-correction model (NVECM) with monthly Turkish data over the period January 2002–April 2018. (1) EG results indicate bivariate cointegration relationships between the real interest rate, lending rates, and the deposit rate. The real interest rate increases all lending rates, mainly the housing rate. However, the long-run coefficient for the real exchange rate is not statistically significant. The pass-through is higher for the deposit rate than for lending rates. Moreoever, real stock prices shrink substantially where the finance sector has been affected the most. (2) VECM results indicate a cointegration relationship between all the variables except for the real exchange rate, which has a statistically non-significant pass-through coefficient. The real interest rate has a noteworthy long-run positive effect on the housing loans lending rate compared to others. The affirmative effect on real stock prices is the highest for the technology sector. The short-run effect of the real interest rate on lending rates, real stock prices and the real exchange rate are statistically non-significant except for the overall stock price index, and the vehicle loans lending rate which has a higher coefficient than the deposit rate. (3) NVECM results allow testing of eleven hypotheses and highlight the symmetric relationship and the valid pass-through effect, and reject the strong exogeneity assumption for all variables.

scholarly journals Fiscal costs of monetary policy: indirect effects of an interest rate shock on Brazilian public net debt

2016 ◽  
Vol 36 (3) ◽  
pp. 557-579
Author(s):  
LAURA CARVALHO ◽  
ANDRÉ DINIZ ◽  
ÍTALO PEDROSA ◽  
PEDRO ROSSI
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Interest Rates ◽  
Indirect Effects ◽  
International Reserves ◽  
Ambiguous Effect ◽  
The Relationship ◽  
Interest Rate Shock ◽  
Public Bonds

ABSTRACT: The paper estimates the fiscal cost of an increase in the Brazilian policy interest rate - the SELIC - by considering not only the direct effect on the yield of public bonds that are indexed to the SELIC, but also indirect effects on: (i) the yield of public bonds that are indexed to the exchange rate and inflation, and (ii) the stock of public net debt through adjustments in the value of international reserves measured in domestic currency. Projections are based on the estimation of the relationship between interest rates, exchange rates and inflation by means of a vector auto-regression. We conclude that the inclusion of such indirect effects has an ambiguous effect on the response of the implicit interest rate on public net debt to shocks in the SELIC, when adjustments in the value of international reserves are not considered. However, the inclusion of the latter amplifies the fiscal cost of a more restrictive monetary policy. These results call for a better coordination between monetary, fiscal and exchange rate policies in Brazil.

scholarly journals MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA

2011 ◽  
Vol 13 (4) ◽  
Author(s):  
Akhis R. Hutabarat
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Risk Premium ◽  
Nominal Exchange Rate ◽  
Monetary Transmission ◽  
Cost Channel ◽  
Long Run ◽  
Pass Through ◽  
Exchange Rate Pass Through

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.Keywords: Exchange rate, Balance of Payment, Monetary transmission and policy, Dynamic General Equilibrium.JEL Classification: F41; E52; D58

scholarly journals Policy of Inflation Targeting in the Presence of Fiscal Deficit and External Debt: Opt or Not to Opt.

2011 ◽  
Vol 50 (4II) ◽  
pp. 841-852
Author(s):  
Muhammad Ali Kemal
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Foreign Exchange Market ◽  
Inflation Targeting ◽  
Main Task ◽  
Short Run ◽  
Pass Through ◽  
Exchange Rate Pass Through

The main task of the macroeconomic policy-makers is to control unemployment and inflation at the minimum possible level. Different policies have been tried to control inflation at its minimum possible level and inflation targeting is the most popular among them. It is the commitment to maintain inflation at the announced level and use interest rate as an instrument to control it if it is expected to diverge from the announced level. However in a higher \dollar denominated debt. country Central Bank is reluctant to increase interest rate because it pressurises the foreign exchange market, which leads to exchange rate depreciation. If there is exchange rate pass through effect to prices, depreciation leads to increase in prices. Thus increase in interest rate does not decrease prices instead results in increase in prices. The two important linkages were tested in this study are (i) increase in real interest rate depreciates the currency, and (ii) depreciation in real exchange rate leads to increase in prices. Using VAR model we concluded that real exchange rate is not significantly associated to the real interest rate in the short run and exchange rate pass through effect to prices is not present in Pakistan.

scholarly journals Analysis of the Influence of Interest Rate, Rupiah Exchange Value, Household Consumption, and Import on Inflation in Indonesia Period 2010.Q1 - 2018.Q4

2020 ◽  
pp. 81-91
Author(s):  
Jusmer Sihotang ◽  
Nancy Nopeline
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Time Series Data ◽  
Household Consumption ◽  
Series Data ◽  
Multiple Regression Equation ◽  
Exchange Value ◽  
The Government ◽  
The Interest Rate

This study aims to analyze the effect of the interest rest, the exchange rate of the rupiah, and imports on the inflation in Indonesia. The study used multiple regression equation by using secondary time series. Data from 2008.Q1-2018.Q4. The results showed that the interest rate of SBI, exchange rate of rupiah against US Dollar, private sector household consumption, and the total imports of Indonesia had a simultaneous impact on the inflation in Indonesia. However, partially only the interest rate of SBI and total imports of Indonesia had a significant impact on the inflation in Indonesia, respectivelyon the level ofα = 1% and α= 5%. These results mean that the increasing of interest rate of SBI and Indonesian import could impact the inflation rate in Indonesia. Based on the findings, the policy to control the inflation in Indonesia was Bank Indonesia as the holder of monetary policy needs to oversee the determination of business credit interest rate (micro, retail, and corporate), by commercial banks in order to maintain the rate on the stable and low levels. In addition, the government needs to compose the policy to reduce the dependence on imported goods by providing various facilities and incentives to increase the interest of entrepreneurs to invest in industries that produce imported substitute goods.

Sign in / Sign up

Export Citation Format

Share Document