South African money market volatility, asymmetry and retail interest pass-through

Abstract

The purpose of this paper is to examine the interest rate transmission mechanism for South Africa as an emerging economy in a pre-repo and repo system. It explains how the money market rate is transmitted to the retail interest rates both in the long-run and short-run and tests the symmetric and asymmetric interest rate pass-through using the Scholnick (1996) ECM and the Wang and Lee (2009) ECM-EGARCH (1, 1)-M methodology. This permitted the examination of the impact of interest rate volatility, along with the leverage effect. An incomplete pass-through is found in the short-run. From the entire sample period, a symmetric adjustment is found in the deposit rate, which had upward rigidity adjustment, while an asymmetric adjustment is found in the lending rate, with a downward rigidity adjustment. All the adjustments supported the collusive pricing arrangements. According to the conditional variance estimation of the ECM-EGARCH (1, 1), negative volatility impact and leverage effect are present and influential only in the deposit interest rate adjustment process in South Africa