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

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.