Abstract
We examine the symmetric and asymmetric interest rate pass-through under the fixed exchange rate system in Lebanon using monthly data from 1998:01 to 2016:06. Employing the Johansen cointegration approach, it is found that the pass-through in Lebanon is overshooting, which could be attributed to information asymmetries in the market. Furthermore, the asymmetric behavior of the commercial banks has been investigated by applying the methodology developed by Enders and Chumrusphonlert (2004). The results show that the interest rate on loans responds differently to monetary policy shocks.
Highlights
The choice of a monetary anchor has important impacts on the effectiveness of monetary policy tools
The findings show that the bank deposit rate has a higher long-run interest rate pass-through and slower adjustment than the bank lending rate
LIRt is the interest rate on commercial banks loans at time t, OIRt is the official interest rate set by the central bank at time t, tau0 is the markup/markdown intercept on loan interest rate, and ut is the idiosyncratic error term. τ1 or β reflects the degree of interest rate pass-through and its estimated value should be between zero and one
Summary
The choice of a monetary anchor has important impacts on the effectiveness of monetary policy tools. The credibility and effectiveness of monetary policy is determined by its ability to use its monetary instruments to achieve the primary and secondary goals of price stability, economic growth and employment This credibility is determined by the choice of monetary regime and by the market structure. In case of deflation, expansionary monetary policy through decreasing the level of nominal interest rate will lead to increase aggregate demand by lowering the cost of borrowing In this channel, the financial intermediaries should transmit the authority's message to the public by lowering their interest rates charged on loans. The market structure of banking sector may dominate the presumed role of monetary policy and, the pass-through might be either incomplete or overshooting. The structure performance hypothesis that reflects the non-competitive pricing behaviour is explained by Hannan and Berger (1991) Berger and Hannan (1989) who show that banks are able to adjust their interest rates quicker upward on deposit and downward on loans in concentrated markets
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