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"SOFTWARE is eating the world," proclaims Marc Andreessen, the 40-year-old co-founder of Andreessen Horowitz, a venture-capital firm in Silicon Valley that has leapt to prominence since he set it up in mid-2009 with his partner, Ben Horowitz. That alimentary analogy is shorthand, in Andreessen-speak, for the phenomenon in which industry after industry, from media to financial services to health care, is being chewed up by the rise of the internet and the spread of smartphones, tablet computers and other fancy electronic devices. Mr Andreessen and his colleagues are doing their best to speed up this digital digestion process-and make money from it as they do so.

Andreessen Horowitz has raised piles of cash from investors-it has some $1.2 billion under management-and has been eagerly putting the money to work both in large deals, such as a $50m investment in Skype, an internet-calling service recently acquired by Microsoft, and in a host of smaller companies, such as TinyCo, a maker of mobile games. It has also taken stakes in several of the biggest social-networking firms, including Twitter, Facebook and Foursquare (a service that lets people broadcast their whereabouts to their friends). Along the way it has attracted some prominent supporters. Larry Summers, a former treasury secretary, is a special adviser to the firm and Michael Ovitz, a former Hollywood power-broker, is among its investors.

Some rivals argue that by making big bets on relatively mature companies such as Facebook, Mr Andreessen's firm is acting more like a private-equity firm than as a nurturer of fledgling businesses-and is contributing to a bubble in tech valuations too. "They're behaving in ways that will not be helpful to them in the long run," gripes a financier at a competing venture firm, who insists on anonymity for fear of alienating Andreessen Horowitz's influential founders.

Pooh-poohing such criticisms, Mr Andreessen argues that "growth" investments, such as the one in Skype-which was sold to Microsoft for $8.5 billion in May, netting Andreessen Horowitz a return of over three times its original stake-make sense because profound changes in the technological landscape mean some relatively big companies can still grow to many times their current size. He reckons that talk of overheated valuations among social-media firms is being driven by people who got their fingers burned in the dotcom bust and can't see that the world has changed since then. "All this bubble stuff is people fighting the last war," he says.

Mr Andreessen is also frustrated with Cassandras who occasionally predict that innovation in computer science is pretty much over. Andreessen Horowitz's partners believe there are still plenty more "black swans"-ideas with the potential to trigger dramatic changes in technology-to come in computing, which explains why they have resisted the temptation to copy other big venture outfits that have diversified into new areas such as biotech and clean tech. "This is an evergreen area. Just when you think computer science is stabilising, everything changes," he says.

For instance, he believes that networking and storage technology is about to go through the same kind of fundamental transition that the server business experienced in the late 1990s, when expensive, proprietary servers were replaced by much cheaper ones that used new technology. That shift made possible the explosive growth of firms such as Google and Facebook, who bought large numbers of cheap servers to power their businesses. Mr Andreessen reckons a similar change in the networking and storage world will lead to the creation of many more new companies.

He is also convinced that there will be dramatic changes in the realm of personal technology. One of the companies that Andreessen Horowitz has invested in is Jawbone. Best known for its Bluetooth-equipped headsets and portable speakers, the firm is developing plans for a range of wearable smart devices that operate on a single software platform, or "body-area network". "Jawbone is the new Sony," claims Mr Andreessen, who predicts that its future products will prove wildly successful as people carry more and more networked gadgets around with them.
From boom to bust
It is tempting to discount such a grandiose claim as typical venture-capital puffery. But Mr Andreessen is hardly a typical venture capitalist. Raised in small towns in Iowa and Wisconsin, he started playing around on the internet while at university and co-created Mosaic, which became the first widely used web browser. After moving to Silicon Valley, he started Netscape Communications when he was 22 years old. Its stockmarket flotation in 1995 marked the beginning of the dotcom boom and made Mr Andreessen a celebrity in the business world.

Having at first dismissed Netscape, Microsoft sought to crush the fledgling company, whose browser posed a threat to the dominance of Microsoft's Windows platform. Mr Andreessen maintains that most big companies are painfully slow to react to upstarts that might threaten their business-a point made in Clayton Christensen's book, "The Innovator's Dilemma", which is one of the few business-school texts Mr Andreessen thinks is worth reading. But he admits Microsoft "did a remarkably good job" in the 1990s.

After a bruising battle a much-diminished Netscape was sold to AOL in 1999 and Mr Andreessen went on to found Loudcloud, a cloud-computing firm, with Mr Horowitz and other executives. But Loudcloud was soon caught up in the fallout from the dotcom bust. To survive, it shed staff, renamed itself Opsware and focused on software development before being sold to Hewlett-Packard for $1.6 billion in 2007. Mr Andreessen then spent some time as an angel investor before launching Andreessen Horowitz.

Mr Andreessen's own experience as practising entrepreneur makes him ideally placed to counsel the bosses of start-ups that his firm has funded, including Mark Zuckerberg of Facebook and Mark Pincus of Zynga, a social-gaming company. Mr Andreessen seems especially fond of what he calls "founder CEOs", perhaps because he was once one himself. Many venture firms tend to back young entrepreneurs for a period before replacing them with professional managers. But Mr Andreessen argues that founders who stuck with their businesses for a long while were often the ones who created many of the biggest successes in technology, including Microsoft (Bill Gates), Amazon (Jeff Bezos) and Oracle (Larry Ellison).
"Just when you think computer science is stabilising, everything changes."
Another reason that Mr Andreessen has become something of an entrepreneur-magnet is his extensive network of contacts in Silicon Valley. He sits on the boards of Hewlett-Packard, eBay and Facebook, among others. This gives him an ideal perch from which to spot trends forming. "Marc has a view of the entire tech ecosystem that very few people have," says David Lieb, the boss of Bump, a wireless start-up in which Andreessen Horowitz has invested.

His fans claim that Mr Andreessen's ability to draw insightful conclusions from these trends helps Andreessen Horowitz stand out from the crowd. "In a world where there is a lot of dreaming, hoping and guessing, Marc takes a really analytical approach," says Mr Summers, who signed on as a part-time adviser to the firm after meeting with a number of other venture outfits. Mr Andreessen's symbiotic relationship with Mr Horowitz, a highly experienced manager, is also said to be central to the firm's success. Tim Howes, a co-founder of RockMelt, a browser company in which Andreessen Horowitz has invested, jokes that the two men have worked together for so long that they are like an old married couple who complement one another perfectly.
The Hollywood treatment
Their partnership has spawned a bold new approach to firm-building in Silicon Valley. Most venture firms employ a skeleton staff of in-house experts in areas such as recruiting and marketing to help advise start-ups. Andreessen Horowitz, which has a total staff of 36, has taken a different approach. In addition to its six general partners, the firm has hired a bevy of executives who are specialists in particular areas, including 11 dedicated to recruitment. This set-up, says Mr Andreessen, is inspired by Creative Artists Agency, which used to be run by Mr Ovitz. It and other Hollywood talent-management companies spend a great deal of time nurturing directors and film stars, and helping them to find jobs. Andreessen Horowitz wants to do the same thing for talented tech folk, whose career paths might one day involve a stint at one of the firms it backs.

This in-house entourage also reflects Mr Andreessen's firm belief that many start-ups today are damaging their prospects by starving areas such as sales and marketing of investment on the often misguided assumption the internet will magically guarantee them a sizeable market. Mr Andreessen says he really wants to back "full-spectrum firms" that aim to be outstanding in every operational area, rather than just a few. Andreessen Horowitz's team will provide advice and guidance on how best to achieve this.

Many of these firms will be American ones. Mr Andreessen won't rule out investing in other countries-Skype, for example, started in Estonia and is now based in Luxembourg-but says his firm has a preference for America because he believes it remains the best place in the world to build companies. Still, many internet start-ups need to think global early on these days, which is one reason why Andreessen Horowitz has engaged Mr Summers to give it advice on everything from pricing strategies to geopolitics.

Yet Mr Andreessen is especially bullish about Silicon Valley, where the process of knowledge-sharing that drives innovation has been greatly accelerated by the internet and the rise of social networking. "It now feels like we were operating in the Stone Age when I first came out here," he says. Another notable change is a democratisation of entrepreneurialism in the Valley. Entrepreneurs no longer simply follow a well-worn path to venture funds' doors from a handful of giant technology companies such as HP and Intel; today they come from a much wider range of backgrounds. In addition, says Mr Andreessen, there has recently been "a massive brain drain from Boston to the Valley, which has all but gutted Boston as a place for high-tech entrepreneurship".

This narrow geographic focus means that Andreessen Horowitz could be in danger of missing out on the fat profits to be made backing entrepreneurial outfits founded in some of the world's largest and fastest-growing markets. But Mr Andreessen likes to point out that it is no accident that Silicon Valley has produced a string of success stories from Netscape to eBay, Google, Facebook and Twitter. China, India and other markets may be exciting places, but a large proportion of the software that is "eating the world" still seems to come from California.

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"SOFTWARE is eating the world," proclaims Marc Andreessen, the 40-year-old co-founder of Andreessen Horowitz, a venture-capital firm in Silicon Valley that has leapt to prominence since he set it up in mid-2009 with his partner, Ben Horowitz.

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Why Gigi Hadid Wants Her Employees to Have Hobbies; The supermodel's morning routines revolve around her daughter, Khai, with whom she does yoga and goes "running."

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Florsheim, L. (2023, Jan 23). Tracy anderson on what people get wrong about working out; the fitness entrepreneur also talks about loving 'star wars,' her aversion to plain water and following a (mostly) vegan diet. WSJ : The Magazine from the Wall Street Journal, Retrieved from https://libaccess.fdu.edu/login?url=https://www.proquest.com/magazines/tracy-anderson-on-what-people-get-wrong-about/docview/2768172929/se-2

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Florsheim, L. (2023, Jan 23). Tracy anderson on what people get wrong about working out; the fitness entrepreneur also talks about loving 'star wars,' her aversion to plain water and following a (mostly) vegan diet. WSJ : The Magazine from the Wall Street Journal, Retrieved from https://libaccess.fdu.edu/login?url=https://www.proquest.com/magazines/tracy-anderson-on-what-people-get-wrong-about/docview/2768172929/se-2

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Interest rate pass-through in the Dominican Republic - ProQuest

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Interest rate pass-through in the Dominican Republic - ProQuest

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Interest rate pass-through in the Dominican Republic

Francesco Grigoli &

José M. Mota

Latin American Economic Review
volume 26, Article number: 4 (2017) Cite this article

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Abstract

A well-functioning monetary transmission mechanism is critical for monetary policy. As the Dominican Republic recently adopted an inflation targeting regime, it is even more relevant to guarantee that changes in the monetary policy rates are quickly and fully reflected in retail rates, to eventually influence aggregate demand and inflation. This paper estimates the interest rate pass-through of the monetary policy rate to retail rates and explores asymmetries in the adjustment. We find evidence of complete pass-through to retail rates, confirming the effectiveness of the monetary policy transmission mechanism. However, our results also suggest a faster pass-through to lending rates than to deposit rates and asymmetric adjustments of short-term rates, as deposit rates respond faster to policy rate cuts and lending rates respond faster to policy rate hikes. Measures to enhance competition in the financial system could help to achieve a symmetric adjustment of retail rates.

Introduction

The global slowdown and recent price developments renewed the interest in evaluating the effectiveness of monetary policy. It is widely acknowledged that an effective monetary policy relies on a well-functioning transmission mechanism. If changes in monetary policy rates are quickly and fully transmitted to retail rates, the latter have a faster impact on domestic demand and therefore inflation (Mishkin 1995; Becker et al. 2012). Conversely, if retail rates are sticky, the monetary policy goals take longer and are harder to achieve. As the Dominican Republic recently adopted an inflation targeting regime, it is even more relevant to ensure that changes in the monetary policy rates are quickly and fully reflected in retail rates to eventually affect inflation.

The theoretical literature advanced several possible explanations as to why the interest rate pass-through may be slow, incomplete, more than complete, or asymmetric. These include asymmetric information, menu costs, switching costs, risk sharing, ownership of the financial system, economic conditions, and bank concentration. While the empirical literature for advanced and emerging economies is vast, the evidence for the Dominican Republic remains limited.

In this paper, we estimate the interest rate pass-through for retail rates in the Dominican Republic. The contribution to the existing literature is twofold. First, we provide a wide spectrum of results for retail rates at different maturities and for a recent period, with some analysis of the fiscal costs (i.e., public sector borrowing costs) associated with monetary policy. Second, we test for asymmetries in the adjustment to equilibrium and simulate the symmetric and asymmetric adjustment of retail rates to changes in the monetary policy rate.

We find evidence of complete pass-through to retail rates, confirming the effectiveness of the monetary policy transmission mechanism. Similarly, our results indicate that government domestic bond yields increase when monetary policy becomes more contractionary. However, we also find evidence of a faster pass-through to lending rates than to deposit rates. Moreover, short-term deposit rates respond faster to policy rate cuts with respect to hikes, while short-term lending rates respond faster to policy rate hikes with respect to cuts. The theoretical literature associates asymmetries in the speed of adjustment to collusive market behaviors. Thus, measures to boost competition in the financial system could help to achieve a symmetric adjustment of retail rates.

The paper is organized as follows. Section II reviews the theoretical contributions explaining rigidities and asymmetries in the interest rate pass-through, comments on the institutional features of the financial system of the Dominican Republic, and discusses the empirical evidence for the country. Section III presents the empirical strategy. Section IV discusses the results. Section V concludes.

The pass-through in the Dominican Republic

In this section, we briefly review the main theoretical reasons for which retail rates may show stickiness or asymmetries when the monetary policy changes. Then, we describe the institutional framework of the Dominican banking system and review the existing empirical literature on the interest rate pass-through for the Dominican Republic.

Theoretical contributions

Stiglitz and Weiss (1981) relate stickiness to asymmetric information. When banks perceive the default risk to be high, they are inclined to maintain a large spread between lending and deposit rates. However, given that borrowers that accept higher rates are likely to be of poor quality and borrowers with less risky investments are likely not to borrow if rates increase (i.e., adverse selection), and given that any increase of lending rates will give incentives for borrowers to choose riskier projects (i.e., moral hazard), any monetary policy rate increase would raise the probability of loan default. Thus, banks may decide not to raise their rates albeit their cost for getting funds increases, and reach the equilibrium in the loan market by rationing credit. As a result, lending rates may be rigid upwards and adjustment may turn out to be asymmetric.

Bernanke et al. (1996) show that financial frictions may cause large fluctuations in economic activity, and consequently in retail rates. In the presence of asymmetric information, lenders may require borrowers to collateralize their assets. In response to a monetary policy rate hike, for example, the balance sheets of firms deteriorate owing to the fall in asset prices. As a result, firms have less ability to borrow, which ultimately affects investment. This starts a vicious cycle (i.e., financial accelerator) where lower economic activity dampens asset prices, which further tightens financing conditions and reduces economic activity. This mechanism may induce overpass-through from the monetary policy rate to the retail rates.
Footnote1

De Bondt (2005) uncovers another reason for which asymmetric information leads to overpass-through. Banks may react to risks involved in asymmetric information by raising interest rates beyond the size of the increase in the policy dictated rate, instead of rationing credit. In other words, lending rates must increase by an amount greater than the increase in the monetary policy rate to compensate for the decrease in the probability of repayment. However, there is a limit to this. Beyond some interest rate level, banks will not be able to increase the interest rate sufficiently to compensate for this risk and all lending will be made to the less risky borrowers. However, until this happens, the bank rate on these loans should be very sensitive to changes in the market interest rate.

Rotemberg and Saloner (1987) explain price rigidity by formulating the menu costs theory. This predicts that firms will change their prices only when the benefits from doing this are greater than the costs of changing prices (e.g., printing, advertising new price lists, communicating to customers, etc.). Hence, if the monetary policy rate change is perceived as small and temporary, and the costs associated to changing retail rates are higher than the benefits, banks may opt to delay the retail rate changes.
Footnote2

Lowe and Rohling (1992) argue that switching costs can cause retail rates rigidity. Banks incur costs to collect information about the risk profile and behaviors of their customers and these are generally passed on to them as one-off fees. If costs associated to switching to a different bank are high enough, customers may decide to accept a more penalizing interest rate by their current bank instead of incurring these costs. Thus, higher switching costs may imply stickiness of retail rates as well as asymmetric adjustment.

Fried and Howitt (1980) show that banks and customers are better off by sharing risk and this increases retail rates rigidity. More specifically, as movements in interest rates affect banks’ and customers’ earnings, banks could offer an equilibrium risk-sharing agreement (e.g., an insurance contract) for which banks agree to compensate customers in case of unfavorable interest rate movements against the payment of a fee. Customers would then hesitate to change banks because of this agreement. Similarly, Berger and Udell (1992) highlight the role played by implicit contracts for which banks interested in long-term relationships are willing to offer more stable interest rates. All these kinds of agreements result in stickier retail rates.

The ownership structure of the financial system also plays a role in shaping the transmission mechanism of monetary policy. State-owned financial institutions are often the key in achieving policy objectives of governments, and as a result maximizing profit is not their primary aim. In this context, interest rates are likely to adjust with a delay due to inefficiencies and political considerations, hence causing stickiness in interest rate adjustment.

Égert et al. (2007) and Égert and Macdonald (2009)highlight the role of macroeconomic conditions in affecting retail rates stickiness. If volatility is high, the information content of policy signals is reduced as noise increases. Consequently, banks would wait more to change their rates. Moreover, the pass-through is likely to be faster during high inflation periods as prices are adjusted more frequently. High economic growth also favors a quicker pass-through as banks find it easier to pass on changes when conditions are favorable.

The interest rate pass-through may be asymmetric because bank concentration leads to oligopolistic behaviors. On one hand, the collusive behavior hypothesis of Hannan and Berger (1991) suggests that following an increase in the monetary policy rate, deposit rates could be rigid upwards because higher deposit rates represent an additional cost for banks. Similarly, the lending rates could exhibit downward rigidity in reaction to a reduction in the monetary policy rate as lower lending rates imply lower profits for banks. On the other hand, the adverse customer reaction hypothesis indicates that if customers have bargaining power deposit rates could be rigid downwards when the monetary policy rate falls and lending rates may be rigid upwards when the monetary policy rate increases.

Characteristics of the Dominican financial system and empirical evidence

The recent history of the Dominican Republic’s monetary policy starts with the Monetary and Financial Law of 2002. The law strengthened the institutional framework for the conduct of monetary policy by establishing price stability as the main central bank’s mandate. Starting in 2004, the central bank moved away from exchange rate targeting and transitioned to monetary targeting. In this context, it introduced an overnight deposit window and a Lombard facility, which created a corridor for the interbank rate. The overnight rate served as signal of the monetary policy stance.

The monetary targeting anticipated the transition to the inflation targeting regime. While the central bank managed to significantly reduce inflation and stabilize the economy under the monetary targeting, financial innovation and deregulation as well as financial sector reforms generated a growing instability in money demand, weakening the relationship between money and inflation (Andújar 2014). To strengthen monetary policy effectiveness, the BCRD adopted an inflation targeting regime in January 2012. Starting in February 2013, the authorities introduced the monetary policy rate as the benchmark rate, which is in the middle of a corridor bounded by the one-day deposit and expansion facilities.

Since the financial crisis of 2003–04, the financial system developed considerably but remains highly concentrated. As of June 2015, the system is composed of 65 financial entities with assets over 45% of GDP and a loan portfolio of 27% of GDP.
Footnote3,
Footnote4 Most of the loans go to the commercial sector (58.7%), while the remainder is split between personal consumption loans (24%) and mortgage loans (17.3%). Commercial and mortgage loans are usually backed by a collateral, which contributes to lower the interest rate. In June 2006, the three main banks used to represent 57.5% of deposits and 58.2% of loans, while as of June 2015 they represent 67.7% of deposits and 69.0% of loans.

As discussed, the degree of concentration is often associated with collusive behavior. This generally translates into high profits for banks as well as asymmetries in the adjustment of retail rates to the monetary policy rates. In the Dominican Republic, spreads are high at all maturities (6.5% on average for 3-month spread over 2006–2015) and vary significantly when the monetary policy rate changes.
Footnote5 This suggests that deposit and lending rates may either react differently to changes in the monetary policy rate, react asymmetrically to lifts and cuts in the monetary policy rate, or both.

Table 1 summarizes the findings of the empirical literature on interest rate pass-through for the Dominican Republic. Sample size, interest rate variables, model specifications, and estimation methodologies vary significantly across studies. Most of the literature finds evidence of overpass-through to lending rates, albeit the results present a significant variation in the estimated pass-through. As for the deposit rates, results are generally mixed, with estimates ranging from incomplete to overpass-trough.

Table 1 Literature for the Dominican Republic

Full size table

González Pantaleón (2010) finds over pass-through of the interbank rate to both lending and deposit rates. He employs an error correction model (ECM) to estimate a specification that includes several explanatory variables. He finds that the Emerging Market Bond Index (EMBI) spread, the reserve requirement coefficient, and the Lombard window rate are significantly associated to increases in retail rates.

Rivas (2011) is the first to explore asymmetries in the interest rate pass-through for the Dominican Republic. With an asymmetric ECM applied to a parsimonious specification that includes only the interbank rate, he studies the adjustment of the retail rates to positive or negative changes in the monetary policy rate. He finds overpass-through for the 6-month and 1-year lending rates and completes pass-through for the same maturity deposit rates. He also finds evidence of increased efficiency of monetary transmission mechanism in the post-crisis period compared to the pre-crisis one. Finally, he does not find any evidence of asymmetric adjustment.

Medina Cas et al. (2011) find a high degree of stickiness in the pass-through to deposit and lending rates. Using a 40-country panel data over the period 2004–2010, the authors estimate a dynamic specification with system generalized method of moments (S-GMM) that includes interaction terms between the monetary policy rate and a set of explanatory variables. The authors find that although the estimated pass-through for the Dominican Republic is incomplete owing to high dollarization and limited exchange rate flexibility, it is greater than for Central American countries.

By employing an ECM, Andújar (2012) finds a complete pass-through to lending rates and an incomplete one to deposit rates. Also, his results suggest that starting in 2005 the monetary transmission mechanism became more efficient and that changes in the interbank rate take from four to 5 months to be reflected in retail rates. Finally, using simulations the author shows that permanent changes in the policy rates are associated with a stronger reaction of retail rates compared to temporary changes.

Aristy Escuder (2014) finds evidence of overpass-through for both lending and deposit rates. More specifically, he estimates an autoregressive distributed lag (ADL) model with a parsimonious specification including only the overnight rate. His results suggest that the size of the overpass-through is much larger than in the existing literature.

Banco Central de la Republica Dominicana (2015) also finds overpass-through to the lending rates, but incomplete or complete pass-through to the deposit rates. While estimation details are not available, the study presents results for a wide range of interest rates and for the calculations of the speed of adjustment in months. This ranges between one and 2 months for all interest rates, with the exception of the 6-month lending rate, which adjusts in about 4 months.

Empirical strategy

Let rr t denote the endogenously determined retail rate at time t:

rr
t=α+
β
1
mpr
t+
β
2
X
t+
u
t,rr�=�+�1mpr�+�2��+��,

(1)

where α is an intercept which denotes a mark-up or mark-down on the retail rate to reflect market conditions,
Footnote6 mpr t is the monetary policy rate,
Footnote7 X t includes a set of factors influencing the retail rate beyond the monetary policy rate, β ₁ and β ₂ are the relative coefficients, and u t is a stochastic error term that captures unobserved heterogeneity.
Footnote8

Departing from most papers in the literature, we employ a richer specification with the vector of exogenous covariates X t encompassing five variables. First, we add the reserve requirement coefficient for commercial bank deposits at the central bank in local currency as increases in the coefficient correspond to withdrawals of liquidity in the financial system, resulting in higher retail rates. Second, we also add non-performing loans (NPLs) as a share of total loans with the aim of capturing increases (decreases) in the lending (deposit) rates that compensate higher banks’ losses when NPLs increase. Third, we include the average exchange in the event retail rates adjust to maintain a stable pace of depreciation rather as a reaction to changes in the monetary policy rate. Fourth, we include the EMBI spread as a time-varying measure of the risk premium. And fifth, we add the Volatility Index (VIX) to reflect external market’s volatility (especially advanced economies) expectation for the next 30 days. The expected effect of the VIX is ambiguous. When volatility in advanced economies is high, interest rates may drop as capital flies toward emerging markets such as the Dominican Republic, or may go up if volatility is perceived as a global issue and capital flies to quality. Finally, we add two dummy variables for regime changes. The first one is for the inflation targeting period and the second is for the period in which the monetary policy rate was introduced as a benchmark.

Our attention falls on the fraction of the change in monetary policy rate reflected in changes in retail rates over the long run.
Footnote9 This is expressed by the parameter β ₂, which is close to zero when the transmission mechanism is weak and takes value one when the pass-through is complete. As discussed, a bunch of factors may prevent the pass-through to be complete, and in some cases, β ₁ could be higher than one, implying overpass-through.

With the purpose of having a wide glance at the financial system, we analyze the impact of changes in monetary policy on several retail rates with monthly data over the period June 2006–June 2015. In particular, rr t is, alternatively, the deposit or lending rate at 90, 180, 360 days, the weighted average rate, as well as the commercial, personal consumption, and mortgage lending rate of commercial banks.
Footnote10 Also, we explore the interest rate pass-through from the monetary policy rate to government domestic bond rates for instruments at 5, 7, and 10 years, as well as for 10-year government bonds issued in the sovereign market. However, since these kinds of instruments are not issued every month, we rely on the interest rate in the secondary market. Given the reduced sample size, results need to be taken with caution.
Footnote11

The literature often finds that interest rate series are non-stationary. In the presence of unit roots, estimating Eq. (1) with ordinary least squares would result in spurious coefficients. Thus, we first test the levels and first differences of all series for unit root employing the Augmented Dickey Fuller (ADF) test. When the hypothesis of unit root cannot be rejected for the levels, we test for cointegration between the retail rates and the monetary policy rate using the Engle-Granger test.

In those groups of data for which cointegration are not found, we estimate the following ADL model:

Δ
rr
t=η+
γ
1Δ
mpr
t+
∑
i=1
n
γ
iΔ
mpr
t−i+
δ
1Δ
X
t+
∑
k=1
m
δ
kΔ
X
t−k+
∑
j=1
p

ζ
jΔ
rr
t−j+
ε
t,Δrr�=�+�1Δmpr�+∑�=1�⁡��Δmpr�−�+�1Δ��+∑�=1�⁡��Δ��−�+∑�=1�⁡��Δrr�−�+ε�,

(2)

where ∆ is the difference operator, η is the constant, γ ₁ is the short-run pass-through (i.e., within the same month), δ k are the coefficients for the changes in the variables of vector X t and their lags, ζ j are the coefficients for the changes of the lags of the dependent variable, n, m, and p are the maximum number of lags, and ɛ t is a white noise error term. The long-run pass-through coefficient β ₁ can be retrieved as

∑
n
i=1/(1−
∑
p
j=1
ζ
j)∑�=1�/(1−∑�=1���).

For groups of data sharing a long-run relationship (i.e., cointegrated), Eq. (2) can be re-parameterized into an error correction model (ECM) that ties the short-run disequilibrium to the long-run equilibrium (Hendry and Nielsen 2007):

Δ
rr
t=η+
γ
1Δ
mpr
t+
∑
i=1
n
γ
iΔ
mpr
t−i+
δ
1Δ
X
t+
∑
k=1
m
δ
kΔ
X
t−k+ρ
u
t−1
+
ε
t,Δrr�=�+�1Δmpr�+∑�=1�⁡��Δmpr�−�+�1Δ��+∑�=1�⁡��Δ��−�+���−1+ε�,

(3)

where ρ is the percentage of the previous period deviation from to the long-run equilibrium u t − 1 that is corrected in every period t. In other words, it represents the speed at which bank rates adjust back to equilibrium after a change in the monetary policy rate.
Footnote12

Enders and Siklos (2001) show that the Engle–Granger cointegration test is misspecified if adjustment is asymmetric. In particular, they argue that it is a special case of the threshold autoregressive (TAR) model, which allows testing for asymmetric cointegration. The TAR model can be written as:

Δ
u
t=
I
t
ρ
1
u
t−1+(1−
I
t)
ρ
2
u
t−1+
∑
l=1
q
γ
lΔ
u
t−l+
v
t,Δ��=���1��−1+(1−��)�2��−1+∑�=1�⁡��Δ��−�+��,

(4)

where I t is the Heaviside indicator function such that:

I
t={

1,
u
t−1≥τ
0,
u
t−1<τ,��={1,��−1≥�0,��−1<�,

(5)

and ρ ₁ and ρ ₂ are the estimates if u t₋₁ is above or below the threshold τ, respectively. The value of τ is unknown and can be estimated using the method illustrated in Chan (1993). However, it can also be set a priori. In our case, we set it to zero and we also estimate it. Enders and Siklos (2001) propose the Φ and the t-max statistics to test for asymmetric cointegration. The Φ statistic is an F-statistic testing the null hypothesis that ρ ₁ = ρ ₁ = 0, while the t-max is a t-statistic testing the null hypothesis with the largest ρ i = 0.
Footnote13 Hence, if the null hypothesis of no cointegration is rejected, we can test the null hypothesis that ρ 1  = ρ ₂ by a standard F-statistic. A rejection of this hypothesis implies asymmetric adjustment.

# data[].attributes.headline
Johnson for, S. K. (2022, Sep 29). A traditional hamptons estate, with a french twist; interior designer pierre yovanovitch makes his splashy U.S. debut by reimagining the east hampton, NY estate that was once the summer home of jaqueline kennedy onassis. WSJ : The Magazine from the Wall Street Journal, Retrieved from https://libaccess.fdu.edu/login?url=https://www.proquest.com/magazines/traditional-hamptons-estate-with-french-twist/docview/2718859880/se-2

# data[].attributes.subject
Johnson for, S. K. (2022, Sep 29). A traditional hamptons estate, with a french twist; interior designer pierre yovanovitch makes his splashy U.S. debut by reimagining the east hampton, NY estate that was once the summer home of jaqueline kennedy onassis. WSJ : The Magazine from the Wall Street Journal, Retrieved from https://libaccess.fdu.edu/login?url=https://www.proquest.com/magazines/traditional-hamptons-estate-with-french-twist/docview/2718859880/se-2