A Threshold Cointegration Analysis of Turkish Loan Rates

Abstract

After global financial crisis in 2008, new discussions raised in the monetary transmission mechanism literature. In this sense, in end-2010, the Central Bank of Republic of Turkey (CBRT) has adopted unconventional approach where multiple interest rates would be used to conduct a more effective monetary policy. This study assesses how policy-induced changes in interbank money market rates affect commercial banks' interest rates for consumer, vehicle, housing and commercial loans in Turkey over the period of 2011M1-2019M7. To do so, asymmetric threshold cointegration approach by Enders and Siklos (2001) is employed, where threshold autoregressive (TAR) and momentum threshold autoregressive models (MTAR) is used to capture the asymmetric adjustment behaviour of the loan rates. Empirical results show that complete pass-through exists only in consumer and vehicle loan rates while incomplete pass-through exists in housing and commercial loan rates. The asymmetric adjustment behaviour appears to vary across loan types and different model specifications. Specifically, the asymmetric adjustment in housing loan rates in the form of downward rigidities implies that housing loan rates respond faster to increases in interbank money market interest rates. Within this context, our findings suggest that several steps to intensify the competition in banking sector could provide complete and symmetric pass-through processes, which will eventually strengthen the efficiency of monetary transmission mechanism. Keywords: Interest Rate Pass-Through, Loan interest rates, Asymmetric Threshold Cointegration