New Evidence of Interest Rate Pass-through in Taiwan: A Nonlinear Autoregressive Distributed Lag Model

We adopt the newly developed nonlinear autoregressive distributed lag model, advanced by Shin, Yu and Greenwood-Nimmo (2014) Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework, in: Festschrift in Honor of Peter Schmidt, pp. 281–314 (New York: Springer)], to investigate the interest rate(IR) pass-through (IRPT) mechanism in Taiwan from 1971 M07 to 2014 M11. We find that the incomplete IRPT mechanism of deposit markets shows an asymmetric adjustment in the short run and symmetric adjustments in the long run. The deposit rate is rigid downward, which supports the customer reaction hypothesis. Moreover, we find that both the short-run and the long-run IRPT channels from the policy rate to the lending rate are also incomplete in the short run but not in the long run. The purpose of this paper is to provide accurate assessment criteria for the central bank to understand the nonlinear dynamics among the policy IR and the retail IR, thus leading to more efficient policy-making and forecasting for the Taiwanese government.