The interest rate pass-through by loan size: Evidence for Mexico, 2011-2019

Abstract

This paper measures the impact of changes in the central bank's reference rate on bank lending rates at both the aggregate level and by loan size. Our data come from the payroll and personal loan markets in Mexico for the period comprising 2011 to 2019. We use an autoregressive model with distributed lags, which allows for the possibility of asymmetric effects. The results show, among other findings, that the pass-through is small; it is not necessarily positive; asymmetric behaviour cannot be ruled out; and, its value depends on the loan size. These results imply that the effectiveness of monetary policy is weakened, in addition to the fact that the reaction of banks to changes in the target interest rate may have distributional implications. The originality of the paper lies in the grouping of interest rates by loan size and the use of a methodology that allows us to assess the existence of asymmetries. Its main shortcoming is the lack of data regarding the characteristics of the borrowers.