Reassessing the Asymmetries and Rigidities in the Interest Rate Pass-Through Process: A Hidden Co-Integration Approach

This paper reassesses the existing asymmetries and rigidities in the interest rate pass-through transmission channels, applied in the advanced economies of the US, the UK, Canada, Japan and the Eurozone. A Crouching Error Correction Model econometric methodology is implemented. The accurate measurement of the different aspects of the pass-through interest rate process has upgraded our understanding related to the behavior of the retail interest rate markets and, perhaps more importantly, enhances our practical efficiency in conducting monetary policy actions, at both a country-by-country and a coordinating level. Our empirical results suggest that monetary policy targeting should rather focus more directly on the money market rates transmission channel, instead of the central bank rates channel. Also, a non-homogenous price-rigid and asymmetric behaviour was found regarding the loan-deposit markets.