IDEAS home Printed from https://ideas.repec.org/a/nrb/journl/v22y2010p1.html
   My bibliography  Save this article

Interest Rate Pass-Through in Nepal

Author

Listed:
  • Nephil Matangi Maskay,Ph.D.

    (Nepal Rastra Bank)

  • Rajendra Pandit

    (Nepal Rastra Bank)

Abstract

The paper examines the interest rate pass through of the policy interest rate to the market interest rate in Nepal. The span of the empirical exercise covers the phase of interest rate liberalization commencing from the first quarter of 1989/1990 to the final quarter of 2008/2009. The result suggests that there is a significant long run elasticity coefficient of the policy rate (taken to be the bank rate) to the different market rates (e.g. 1 yr fixed deposit, lending rate and saving rate), but there is only one error correcting relationship between the bank rate and the lending rate in the short run. However, the speed of adjustment, i.e. the adaptation coefficient, indicates a weaker adjustment of the short-term dynamics to the long run equilibrium. Looking at the sub-sample, which coincides with the promulgation of the NRB Act 2002, the period starting from the third quarter of 2001/2002 to the final quarter of 2008/2009, suggests that there is insignificant elasticity coefficient between the policy rate and two of the above-mentioned market rates. Paradoxically, while the elasticity coefficient between the policy rate and lending rate is found to be significant, it is negative! Overall, the situation indicates that at present, the bank rate in Nepal is ineffective in influencing the market rates and suggests that there are other factors at play. The paper ends by recommending introduction of a more effective indicator of monetary stance, greater awareness of external factors when making monetary policy, and enhancing and guiding the development of the domestic financial sector for equitable financial development and growth.

Suggested Citation

  • Nephil Matangi Maskay,Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 22(1), pages 1-18, April.
    • Handle: RePEc:nrb:journl:v:22:y:2010:p:1
    as

    Download full text from publisher

    File URL: https://www.nrb.org.np/contents/uploads/2019/12/vol22_art1.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nephil Matangi Maskay, Ph.D. & Satyendra Raj Subedi, 2009. "Development of the Nepalese Financial System: Need for the Formulation of a Master Plan," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 21, pages 1-2, April.
    2. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Nephil Matangi Maskay Ph.D. & Satyendra Raj Subedi, 2009. "Development of the Nepalese Financial System: Need for the Formulation of a Master Plan," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 21, pages 31-51, April.
    5. Xin Long & Mr. Mangal Goswami & Andreas Jobst, 2009. "An Investigation of Some Macro-Financial Linkages of Securitization," IMF Working Papers 2009/026, International Monetary Fund.
    6. Nephil Matangi Maskay, 1998. "The Impact of the Indian Monetary Policy and the Official Exchange Rate of Nepalese Monetary Policy," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 10, pages 44-63, April.
    7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    8. Alexander F. Tieman, 2004. "Interest Rate Pass-Through in Romania and Other Central European Economies," IMF Working Papers 2004/211, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tomoya Suzuki, 2019. "Counterfactual Inflation Targeting in Nepal," South Asian Journal of Macroeconomics and Public Finance, , vol. 8(2), pages 97-117, December.
    2. Suman Neupane, 2011. "Examining Volatility of Interbank Rate in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 37-53, April.
    3. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 22, pages 1-18, April.
    4. Suman Neupane, 2011. "Examining Volatility of Interbank Rate in Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(1), pages 37-53, April.
    5. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 71-91, April.
    6. Nephil Matangi Maskay, Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(2), pages 1-17, October.
    7. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(2), pages 1-17, October.
    8. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(1), pages 71-91, April.
    9. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Macro-Financial Link and Monetary Policy Management: The Case of Nepal," NRB Working Paper 07/2010, Nepal Rastra Bank, Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 22, pages 1-18, April.
    2. Nephil Matangi Maskay, Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(2), pages 1-17, October.
    3. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2011. "Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(2), pages 1-17, October.
    4. Yap, Wei Yim & Lam, Jasmine S.L., 2006. "Competition dynamics between container ports in East Asia," Transportation Research Part A: Policy and Practice, Elsevier, vol. 40(1), pages 35-51, January.
    5. Xiaojie Xu, 2017. "The rolling causal structure between the Chinese stock index and futures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(4), pages 491-509, November.
    6. Ely, David & Salehizadeh, Mehdi, 2001. "American depositary receipts: An analysis of international stock price movements," International Review of Financial Analysis, Elsevier, vol. 10(4), pages 343-363.
    7. Erida Curraj, 2019. "Vintage Design Furniture in Albania, a New Retro Design Paradigm in the Post-Communist Era," European Journal of Engineering and Formal Sciences Articles, Revistia Research and Publishing, vol. 2, ejef_19.
    8. Grigori Fainstein & Igor Novikov, 2011. "The Comparative Analysis of Credit Risk Determinants In the Banking Sector of the Baltic States," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 20-45, June.
    9. Wilton Bernardino & João B. Amaral & Nelson L. Paes & Raydonal Ospina & José L. Távora, 2022. "A statistical investigation of a stock valuation model," SN Business & Economics, Springer, vol. 2(8), pages 1-25, August.
    10. Ashis Kumar Pradhan & Gourishankar S Hiremath, 2020. "Do external commercial borrowings and financial development affect exports?," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1796269-179, January.
    11. Frank Asche, 2001. "Testing the effect of an anti-dumping duty: The US salmon market," Empirical Economics, Springer, vol. 26(2), pages 343-355.
    12. Michael S. Haigh & David A. Bessler, 2004. "Causality and Price Discovery: An Application of Directed Acyclic Graphs," The Journal of Business, University of Chicago Press, vol. 77(4), pages 1099-1121, October.
    13. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
    14. Wang, Peijie & Brand, Steven, 2015. "A new approach to estimating value–income ratios with income growth and time-varying yields," European Journal of Operational Research, Elsevier, vol. 242(1), pages 182-187.
    15. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, June.
    16. Sanjay Ramchander & Marc Simpson & Mukesh Chaudhry, 2003. "The impact of inflationary news on money market yields and volatilities," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 85-101, March.
    17. Jiranyakul, Komain, 2009. "Economic Forces and the Thai Stock Market, 1993-2007," MPRA Paper 57368, University Library of Munich, Germany.
    18. Boris Hofmann, 2003. "Bank Lending and Property Prices: Some International Evidence," Working Papers 222003, Hong Kong Institute for Monetary Research.
    19. Amjad Ali & Marc Audi & Chan Bibi & Yannick Roussel, 2021. "The Impact of Gender Inequality and Environmental Degradation on Human Well-being in the Case of Pakistan: A Time Series Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 11(2), pages 92-99.
    20. Sayef Bakari & Sofien Tiba & Nissar Fakraoui, 2019. "Does Domestic Investment Contribute To Economic Growth In Uruguay? What Did The Empirical Facts Say?," Journal of Smart Economic Growth, , vol. 4(2), pages 53-69, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nrb:journl:v:22:y:2010:p:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publication Division NRB (email available below). General contact details of provider: https://edirc.repec.org/data/nrbgvnp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.