Description

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.

More publications in this series: Working Papers

More publications by: Francesco Grigoli ; José M. Mota