Download Interest Rate Pass-Through To Retail Rates Methodologies

Monetary Policy and the Transmission
Mechanism in Thailand
By
Piti Disyatat
Pinnarat Vongsinsirikul
Motivation
• Understanding transmission mechanism key to
successful conduct of monetary policy
– Time lag
– Channels of transmission
• Compare with evidence from other countries
• How has the crisis affected monetary
transmission?
Presentation Outline
•
The main channels of monetary transmission
•
Interest rate pass-through
•
Response of key macro-variables to monetary shocks
•
Relative importance of each channel
•
Summary and conclusion
Monetary Transmission Mechanism
Transmission
Channels
S-T Interest
Rate
Central Bank
OMO
Interest Rate
Credit
Exchange Rate
Asset Price
Output
and
Inflation
Interest Rate Pass-Through To Retail Rates
Methodologies
1. Dynamic Multiplier Model
2. Error Correction Model (ECM)
Pass Through of RP to 3-Month Deposit Rate
Methodology
Period
Impact
Immediate 3-Month 6-Month Long-Run
Multiplier Method 89M1-95M12
0.057
0.402
0.612
0.7
89M1-02M3
0.059
0.317
0.399
0.429
ECM
Speed of
Adjustment
89M1-95M12
0.5
0.147
89M1-02M3
0.35
0.07
Pass Through of RP to Minimum Lending Rate
Methodology
Period
Impact
Immediate 3-Month 6-Month Long-Run
Multiplier Method 89M1-95M12
0.089
9.328
0.521
0.558
89M1-02M3
0.041
0.239
0.356
0.389
ECM
Speed of
Adjustment
89M1-95M12
0.4
0.101
89M1-02M3
0.356
0.08
International Comparison of MLR Pass-Through
Country
Impact 3 months 6 months Long Run
Germany
0.38
0.67
0.83
1.04
Australia
--
0.35
0.67
0.81
US
0.41
0.97
0.97
0.97
UK
0.82
1.02
1.04
1.04
Denmark
0.07
0.25
0.38
0.71
Finland
0.13
0.2
0.27
0.6
Singapore
0.27
0.71
0.82
0.95
Indonesia
0.2
0.74
0.74
1.00
Philippines
0.24
0.64
0.64
0.64
Malaysia
0.13
0.28
0.37
0.44
Japan
0.03
0.22
0.35
0.53
Thailand
0.09
0.33
0.52
0.56
Impact on 3-Month Deposit Rate
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
89
90
91
92
Impact
3-Month
93
94
95
96
6-Month
Long-Run
97
Impact on MLR
.8
.7
.6
.5
.4
.3
.2
.1
.0
-.1
89
90
91
92
Impact
3-Month
93
94
95
96
6-Month
Long-Run
97
Justification for Interest Rate Stickiness in Thailand
• High switching cost during economic downturn and
fewer alternative sources of funds
• Credit rationing due to asymmetric information
• High liquidity
• Social pressure
• Posted rate
Response to Monetary Shocks
• Time lags
• Channels of transmission
Methodology
• Vector Autoregressions (VARs) analysis
– Dynamic system of equations
– Minimal assumption about structure of economy
– Evidence for other countries readily available
• RP14 indicator of monetary policy
• Sample: 1993 Q1 to 2001 Q4
Basic Model: GDP, CPI, RP14: 2 Lags
• U-shaped output response, maximum impact after 4-5 quarters
Response of GDP to RP14
.002
.000
-.002
-.004
-.006
-.008
-.010
2
4
6
8
10
Quarters
12
14
Components of Aggregate Demand
• Private Consumption
• Investment
• Export
• Import
Response of EXPORT to RP14
Response of IM PORT to RP14
.005
.005
.000
.000
-.005
-.005
-.010
-.010
-.015
-.015
-.020
-.020
-.025
-.025
2
4
6
8
10
12
14
2
Response of CONSUM E to RP14
.005
.000
.000
-.005
-.005
-.010
-.010
-.015
-.015
-.020
-.020
-.025
-.025
4
6
8
10
Quarters
12
6
8
10
12
14
Response of INVEST to RP14
.005
2
4
14
2
4
6
8
Quarters
10
12
14
Channels of Monetary Transmission
• Augment basic model with variable that
represents each channel
• Compare output response with and without
the relevant channel operating
Bank Lending Channel
• Heavy reliance on bank finance in Thailand
Private credit to GDP ratio (average for 1995-2000)
120%
Malaysia
100%
80%
60%
40%
20%
0%
Indonesia Philippines
Mexico
Chile
United States Korea
Thailand
Response of PRICE
.002
Bank Lending Model
.001
• GDP response larger
.000
• LOANS fall after 3 quarters
• PRICE falls after 4 quarters
-.001
-.002
RP14
LOANS
-.003
-.004
2
4
6
Response of GDP
8
10
12
14
Response of LOANS
.004
.015
.010
.000
.005
-.004
.000
-.008
-.005
RP14
LOANS
-.012
-.016
RP14
LOANS
-.010
-.015
2
4
6
8
10
Quarters
12
14
2
4
6
8
10
Quarters
12
14
Bank Lending Channel
Response of GDP to RP14
.008
.004
.000
-.004
-.008
LOANS Endogenous
LOANS Exogenous
-.012
-.016
2
4
6
8
Quarters
10
12
14
Credit intensity of production has fallen
Real GDP and Real Credit
Corporate Bond Issues
840
65
800
60
760
55
720
50
680
45
640
40
360
320
35
560
30
93
94
95
96
97
98
99
240
200
160
120
80
GDP (Left Scale)
Credit (Right Scale)
600
Millions of Baht
Billions of Baht
280
00
01
40
0
93
94
95
Re-estimate over 1993 Q1 to 1999 Q1:
• Impact of RP14 on GDP and LOANS larger
• Impact of LOANS on GDP larger
96
97
98
99
00
01
Bank Lending Channel: 1993 Q1-1999 Q1
Response of GDP to RP14
.010
.005
.000
-.005
-.010
LOANS Endogenous
LOANS Exogenous
-.015
-.020
2
4
6
8
Quarters
10
12
14
Exchange Rate Channel
Response of GDP to RP14
.005
.000
-.005
-.010
-.015
REER Endogenous
REER Exogenous
-.020
-.025
2
4
6
8
Quarters
10
12
14
Asset Price Channel
Response of GDP to RP14
.002
.000
-.002
-.004
-.006
-.008
SET Endogenous
SET Exogenous
-.010
-.012
2
4
6
8
Quarters
10
12
14
Direct Interest Rate Channel
Response of GDP to RP14
.010
.005
.000
-.005
-.010
All Channels
-.015
Traditional Channel
-.020
2
4
6
8
Quarters
10
12
14
Summary Model
Response of INVEST to RP14
Response of CONSUME to RP14
.02
.002
.01
.000
-.002
.00
-.004
-.01
-.006
-.02
-.008
-.03
-.010
-.04
-.012
2
4
6
8
10
12
14
2
Response of PRICE to RP14
4
6
8
10
12
14
Response of LOANS to RP14
.001
.000
.000
-.001
-.004
-.002
-.008
-.003
-.012
-.004
2
4
6
8
Quarters
10
12
14
2
4
6
8
Quarters
10
12
14
Conclusion
Stylized Facts (In Response to a Tightening):
1. GDP displays U-shaped response, trough after
4-5 quarters and dissipating after 11 quarters
2. GDP displays U-shaped response, trough after
4-5 quarters and dissipating after 11 quarters
3. Investment most sensitive component of GDP
Conclusion (cont.)
•
Transmission primarily through interest rate
and bank lending channels
•
Role of banks declined in recent years
- Lower interest rate pass-through
- Weaker bank lending channel
Looking Forward
•
Bank health and corporate balance sheets
•
More sensitivity of retail rates
•
Wider share ownership
•
Greater access to credit: Financial Master Plan
•
Resolution of FIDF problems
Implications for Monetary Policy
•
Significant lags involved in monetary transmission
•
These lags change over time
•
Must be forward-looking
–
Rely on accurate forecasts
–
Constantly look out for structural changes in the economy