The pass-through effect of interest rate and asymmetric adjustment in Indonesia

Abstract

Using the data set for the sample period of January 1999 to December 2016, this paper aims to analyse the interest rate pass-through effect and the asymmetric behaviour of retail rates in Indonesia’s economy. By employing asymmetric threshold autoregressive (TAR) and momentum threshold autoregressive (MTAR) models, the deposit and lending rates were found to have an incomplete pass-through effect in response to the changes in the money market rates. Based on the empirical results, an asymmetric behaviour was discovered in the adjustment of the deposit and lending rates. The asymmetric error correction models further reflected that the deposit rate has a faster speed in the downward direction while the lending rate adjusts more rapidly in the upward direction.