Interest rate pass-through: A meta-analysis of the literature

Abstract

The interest rate pass-through describes how changes in a reference rate (the monetary policy, money market or T-bill rate) transmit to bank lending rates. We review the empirical literature on the interest rate pass-through and systematize it by means of meta-analysis and meta-regressions. Using the pass-through to corporate lending rates as the baseline, we find systematically lower estimated pass-through coefficients in studies that focus on the pass-through to consumer lending rates and rates on long-term loans. Also studies estimating the pass-through by averaging all lending rates into one category report a lower pass-through. Importantly, the interest rate pass-through is significantly influenced by the country's macro-financial environment. In economies with deepening stock markets, the estimated pass-through strengthens significantly. Interestingly, after the global financial crisis, the pass-through weakened across the board, including because of growing trade openness and supply chain financing, rising volatility and stock market turnovers, as well as declining central bank independence. Inflation targeting frameworks, if in place, helped diminish this pass-through weakening.