Interest rate pass-through in South East Europe: An empirical analysis

► We investigate the interest rate channel in Bulgaria, Croatia and Macedonia. ► The results reveal the existence of a cointegrating relationship among some of the interest rates. ► The long-run pass-through is far from complete with the exception of Macedonia. ► The short-run adjustment of lending...

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Bibliographic Details
Published in:Economic systems 2012-12, Vol.36 (4), p.571-593
Main Authors: Petrevski, Goran, Bogoev, Jane
Format: Article
Language:English
Subjects:
Analysis
Cointegration
Economic crisis
Economic theory
Interest rate pass-through
Interest rates
International trade
Investigations
Macedonia
Monetary policy
Money market
Open economies
South East Europe
Southeast Europe
Structural breaks
Studies
Time series
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Summary:► We investigate the interest rate channel in Bulgaria, Croatia and Macedonia. ► The results reveal the existence of a cointegrating relationship among some of the interest rates. ► The long-run pass-through is far from complete with the exception of Macedonia. ► The short-run adjustment of lending rates is also low and sluggish. ► The results provide mixed evidence on the stability of the pass-through. This paper investigates the effectiveness of the interest rate channel in three small open economies with rigid exchange rate regimes in South East Europe – Bulgaria, Croatia and Macedonia – during the period 2000–2010. Specifically, we examine the size and speed of adjustment of bank lending rates to the changes in money market rates by employing various cointegration methods. In addition, we assess the stability of interest rate passthrough during the transition period, including the recent economic crisis. The results reveal the existence of a cointegrating relationship among some of the interest rates. We find that the long-run pass-through is far from complete with the exception of Macedonia. The shortrun adjustment of lending rates is also low and sluggish, implying that the domestic monetary policy may have a limited impact on the interest rate channel. Finally, the econometric investigation provides mixed evidence on the stability of the interest rate pass-through. Therefore, the overall findings of the paper support the view that in small open economies with rigid exchange rates the effectiveness of domestic monetary policy through the interest rate channel is quite limited.
ISSN:0939-3625
1878-5433
DOI:10.1016/j.ecosys.2012.03.001