Bahamas and Barbados: Empirical evidence of interest rate pass-through

This paper uses an error correction model to investigate empirically the effectiveness of central bank interest rate policy in influencing commercial banks’ lending rate behaviour in Barbados and the Bahamas using quarterly data for the period January 1995-April 2007. For Barbados, the study finds that the reaction of commercial bank lending rates to changes in the central bank’s policy rate is sticky in the short run, but fully complete in the long run. On average, it takes about four to six quarters for the full effect of changes in the central bank policy rate to be transmitted to the economy via adjustments. For the Bahamas, the reaction of commercial bank lending rates to changes in the central bank policy rate is fully complete in the short run and the long run, owing to a low adjustment cost coupled with the use of moral suasion.