Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 7 October 2021
Issue publication date: 14 November 2023
Abstract
Purpose
This paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.
Design/methodology/approach
Symmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.
Findings
The findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.
Practical implications
Even though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.
Originality/value
To the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.
Keywords
Acknowledgements
The authors are grateful to the two anonymous reviewers for their insights towards improving the quality of this paper. The authors also wish to thank Dr. Esman Nyamongo from Central Bank of Kenya (CBK) for the helpful comments on this paper. The usual disclaimer applies.
Citation
Nyangu, M.N., Waweru, F.W. and Marwa, N. (2023), "Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya", International Journal of Emerging Markets, Vol. 18 No. 9, pp. 3158-3177. https://doi.org/10.1108/IJOEM-03-2020-0289
Publisher
:Emerald Publishing Limited
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