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Submitted by: Fahad Taqi Allawala (9840) Kinza Aziz Shaik (10419) Submitted to: Madam Sadia Mansoor
Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?
Gigineishvili (2011) states that good understanding of monetary transmission mechanism is vital
for central bank to make the economy move into the required way. Interest Rate is one of the channels that have been subjected to strong scrutiny, which shows that by how and over what time duration inflation is effected by variation in policy interest rate and how changes in central bank policy rate convey longer-term retail interest rates on loans and deposits. Numerical evaluation of pass-through coefficients differ between countries and different scenarios, which suggest that retail pricing by banks in different countries and markets react differently to monetary policy. It is shown the cross country differences in pass-through with country-specific structural and macroeconomic characteristics which estimates country-specific pass-through coefficients using standard way of autoregressive distributed lags and relating these coefficients to macroeconomic variables and indicators of the financial market structure. It has been found out that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. When talk about financial market variable credit quality, overhead costs, and banking competition they were found out to be strengthening pass-through, while excess banking liquidity to obstruct it and fixed exchange regime countries tend to have a weaker pass through. The objective of monetary policy is to achieve and maintain low inflation. The positive relationship between inflation and the strength of pass-through says that by being successful in its key objective which is reducing inflation, a central bank contributes to the weakening of monetary transmission. while improving the regulatory and legal environment, giving information sharing and removing obstacles to banking intermediation could be among objectives of policy makers and financial sector regulators, the reduction in overhead costs would weaken pass-through which make it harder for a central bank to control inflation.