Abstract
The current study aims to examine the relationship between banks’ marginal cost (official policy rate) and retail rates in Turkish banking loan market. We tested asymmetric pass-through by using threshold autoregressive (TAR) and momentum threshold autoregressive (MTAR) and weekly data over the period of 2011:1 to 2021:36. Empirical results reveal that there is incomplete pass-through between policy rate and retail lending rates as vehicle, housing, and commercial loans. We find that while housing and commercial loan rates are rigid downward, vehicle loan rates are rigid upward. The weak and incomplete adjustment indicate that contestability in Turkish banking market has worsened during the last decades. Moreover, positive, and negative asymmetries in transmission process of Turkish banking system imply that impact of central bank decision on macroeconomic variables (such as inflation, growth etc.) is accepted to be weak in Turkey.
Highlights
An essential question in economy is the microeconomic issue of whether prices asymmetrically sticky-whether the speed at which a price increases is different from the speed at which it decreases
The current study aims to examine the relationship between banks’ marginal cost and retail rates in Turkish banking loan market
If monetary policy is efficient, an increase or decrease in the central bank official rate is meant to be transferred to Retail (Loan) Rate (RR), having effect on consumer and business lending rates, investments, inflation rate and aggregate demand and economic growth (Haughton and Iglesias, 2012; Karagiannis et al, 2010)
Summary
An essential question in economy is the microeconomic issue of whether prices asymmetrically sticky-whether the speed at which a price increases is different from the speed at which it decreases. To implement effective monetary policy, when Central Banks increase or decrease its policy IRs (official rates), retail banks should react by transferring any costs to the commercial banks’ lending and deposit rates. Commercial banks should transfer any increase or decrease of policy IR to RRs (including the lending and deposit) rates As mentioned above, this transmission process is called to be “IRPT” (Matemilola et al, 2015). If monetary policy is efficient, an increase or decrease in the central bank official rate is meant to be transferred to RR, having effect on consumer and business lending rates, investments, inflation rate and aggregate demand and economic growth (Haughton and Iglesias, 2012; Karagiannis et al, 2010). Empirical studies indicated that this transmission process from policy rate (set by central bank) to commercial bank IRs incomplete and may be asymmetric. Commercial banks tend to raise retail rates on loans at roughly the same speed as the reference rate, but they lower their rates on loans more slowly
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