Dynamic Models for Monetary Transmission

Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. Parisi et al. (2015) analyzed the Chong error correction model, extended it and proposed an alternative, simpler to interpret, one-equation model: furthermore, they applied it to the recent time period, characterized by very low monetary rates. In this paper we extend the Parisi et al. static model in a dynamic sense, by comparing it with more sophisticated equations such as dynamic linear models and stochastic processes. The main contribution of this work consists in novel, more parsimonious and endogenous models: more precisely, dynamic linear models have been developed in order to capture the changing relationship between monetary rates and bank rates, while stochastic processes have been studied to provide endogenously determined and generalizable models. Secondly, this paper introduces a predictive performance assessment methodology, which allows to compare all the proposed mod-