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Observed and expected interest rate pass-through under remarkably high market rates

Author

Listed:
  • Jose Angelo Divino

    (Catholic University of Brasilia)

  • Carlos Haraguchi

    (Central Bank of Brazil)

Abstract

This paper investigates the pass-through from observed and expected policy interest rates to the remarkably high lending rates in the Brazilian economy, accounting for financial-institution specific characteristics, borrower types, asymmetric adjustment and persistence in loan rates. We use a unique and non-public dataset with expected variables identified by professional forecasters and apply a fixed-effects approach to alternative specifications as robustness checks. Financial institutions correctly forecast the next target level of the policy rate and anticipate adjustments in their loan rates. There is evidence of over-proportional and positively asymmetric pass-through to loans with higher interest rate margins, implying a positive correlation between degrees of pass-through and spreads across persistent lending rates. These findings contribute to explain why loan interest rates are so high in the Brazilian economy.

Suggested Citation

  • Jose Angelo Divino & Carlos Haraguchi, 2023. "Observed and expected interest rate pass-through under remarkably high market rates," Empirical Economics, Springer, vol. 65(1), pages 203-246, July.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:1:d:10.1007_s00181-022-02335-0
    DOI: 10.1007/s00181-022-02335-0
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    More about this item

    Keywords

    Interest rate pass-through; Asymmetry; Lending rates; Monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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