Interest Rate Pass-Through

Interest rate pass-through: the case of Hungary
Csilla Horváth, Judit Krekó, Anna Naszódi Magyar Nemzeti Bank, Budapest, 1850, Szabadság tér 8-9, Hungary Telephone: [phone], Fax: [phone]
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Interest rate pass-through: the case of Hungary
Csilla Horváth, Judit Krekó, Anna Naszódi

Abstract In this paper we analyze the interest rate pass-through in Hungary, with the help of ECM and TAR models, using both aggregated and bank level data. According to the linear ECM results, the corporate loan market, which is characterized by the strongest competition, adjusts its prices fully and quickly to the short-term money market rate. The adjustment of deposit rates and household loan rates is characterized by incompleteness and/or sluggishness. We analyze the potential non-linearities of banks’ pricing by TAR models. The results suggest that the speed of adjustment of bank rates depends on the size of the changes in the money market rate and the distance of bank rates from their long-term equilibrium level. The sign of yield shocks and the volatility of the market rate also turn out to be influential to the speed of adjustment. JEL classifications: E43, E52, G21. Keywords: interest rate pass-through, monetary transmission, ECM, TAR model.

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1 Introduction
The decisions of banks about the yields on their assets and liabilities have an impact on the expenditure and investment behavior of deposit holders and borrowers and hence, on the real economy. Interest rates can influence the real economy through three main mechanisms of the interest rate channel. The reaction of companies and households depends on the magnitude of the substitution effect, i.e. the change in the relative costs of alternative credit and deposit possibilities. Changes in the interest rates alter the costs and incomes of economic agents and, consequently, their net income (income effect). Finally, they affect the value of real and

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