Does the interest rate for business loans respond asymmetrically to changes in the cash rate?

Authors

Abbas Valadkhani, University of WollongongFollow
Amir Arjomandi, University of WollongongFollow
Martin J. O'Brien, University of WollongongFollow

RIS ID

74350

Publication Details

Valadkhani, A., Arjomandi, A. & O'Brien, M. J. (2013). Does the interest rate for business loans respond asymmetrically to changes in the cash rate?. Applied Economics Letters, 20 (9), 869-874.

Abstract

This article examines the dynamic relationship between the Reserve Bank of Australia's (RBA's) cash rate and the variable interest rate for lending to small businesses. The relationship is evaluated via an asymmetric GARCH model using monthly data spanning from August 1990 to October 2012. Our results show that a 1 percentage point increase in the cash rate results in an instantaneous 1.086 percentage point rise in the variable rate for small businesses, whereas an equivalent 1 percentage point cut only leads to a 0.862 percentage point fall with a delay of up to 2 months. This outcome has obvious implications for the RBA's monetary policy transmission mechanism and the effectiveness of the expansionary policy versus contractionary policy.