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Conventional monetary policy and the degree of interest rate pass through in the long run: a non-normal approach

Author

Listed:
  • Dong-Yop Oh

    (Department of Information Systems, University of Texas Rio Grande Valley)

  • Hyejin Lee

    (Department of Information Systems, University of Texas Rio Grande Valley)

  • Karl David Boulware

    (Department of Economics, Wesleyan University)

Abstract

We investigate the long-run pass through of the federal funds rate to the prime rate from February 1987 to February 2015. Unlike previous studies that rely on conventional cointegration tests, this study employs cointegration tests based on the “residual augmented least squares” (RALS). The RALS cointegration tests have been shown to gain power when using a linear model in the presence of non-normal errors. The results indicate a significant cointegrating relation between the federal funds rate and the prime rate with incomplete interest rate pass through.

Suggested Citation

  • Dong-Yop Oh & Hyejin Lee & Karl David Boulware, 2016. "Conventional monetary policy and the degree of interest rate pass through in the long run: a non-normal approach," Wesleyan Economics Working Papers 2016-002, Wesleyan University, Department of Economics.
    • Handle: RePEc:wes:weswpa:2016-002
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    ATT/WTO; Monetary policy; interest rate pass through; cointegration analysis; non-normal errors; RALS;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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