Bank competition, interest rate pass-through and the impact of the global financial crisis: evidence from Hong Kong and Macao

Abstract

PurposeThe authors examine the interest rate pass-through in Hong Kong (HK) and Macao both in the long term and short term.Design/methodology/approachThe authors use time series methodology, i.e. unit root, cointegration and error correction models.FindingsThe results show that in the post-global financial crisis (GFC) period, both the long-run and short-run interest rate pass-through from policy rates to prime rates have disappeared in Macao and are weakened significantly in Hong Kong. The long-term relationship between deposit rates and policy rates no longer exists in either market while the short-term relationship has been reduced significantly.Research limitations/implicationsThe results indicate that the effectiveness of monetary policy in HK and Macao has been seriously undermined in the post-GFC period. New tools are needed in both regions.Practical implicationsMonetary policy transmission via bank interest rates in both HK and Macao are no longer effective after the outbreak of the GFC.Social implicationsEffort to stimulate the economy and/or control inflation will be hampered.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the impact of the GFC on the effectiveness of monetary policy transmission in HK and Macao.