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Interest rate pass-through in the UK: has the transmission mechanism changed during the financial crisis?

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posted on 23.01.2014 by Ahmad Hassan Ahmad, Nusrate Aziz, Shahina Rummun
Interest rate has been the monetary policy tool used by the modern central banks. For monetary policy to be effective, changes in the policy rate should influence the short-term money market rate and retail rates. Using an error correction methodology, this paper examines the short-run and long-run dynamics of interest rate pass through from the LIBOR to four different UK retail rates. The results indicate that interest rate pass-through in the UK is incomplete in the short run, but fairly complete in the long-run and the adjustment of retail rates depend on whether they are below or above their respective long-run values. The results also indicate a temporary, but statistically significant change in the interest rate pass-through since the beginning of the financial crisis in 2007.

History

School

  • Business and Economics

Department

  • Economics

Citation

AHMAD, A.H., AZIZ, N. and RUMMUN, S., 2013. Interest rate pass-through in the UK: has the transmission mechanism changed during the financial crisis? Economic Issues, 18 (1), pp. 17 - 38.

Publisher

© Economic Issues

Version

VoR (Version of Record)

Publication date

2013

Notes

This article was published in the journal Economic Issues [© Economic Issues]. It is also available at: http://www.economicissues.org.uk/Files/2013/113Ahmad.pdf

ISSN

1363-7029

Language

en

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