Monetary Policy Pass-through to Firms and Households in Zambia

Abstract

<jats:p>This paper examines the extent, speed, and asymmetry of monetary policy pass-through to firms and households in Zambia by analysing the responsiveness of SME, corporate, personal, and mortgage lending rates to changes in the interbank rate. The study employs a novel monthly dataset covering the period April 2012 to July 2022 following Zambia’s transition to an interest-rate-targeting framework. Johansen cointegration, Vector Error Correction Model (VECM), Autoregressive Distributed Lag (ARDL), and Nonlinear ARDL (NARDL) models are employed to estimate long-run and short-run pass-through dynamics. Robustness checks are conducted using pre-COVID-19 and structural break sub-samples to assess the effects of the pandemic and macroeconomic instability on monetary transmission. The results reveal incomplete but heterogeneous pass-through across borrower segments, with stronger transmission observed in SME and personal lending rates and weaker transmission in corporate and mortgage lending rates. The nonlinear results further indicate asymmetric pass-through, where banks respond more strongly to monetary tightening than monetary easing, particularly in SME and personal credit markets. In addition, pass-through weakened after the 2015–2016 macroeconomic crisis and during the COVID-19 period, suggesting increased pricing frictions and structural rigidities in Zambia’s credit market. These findings highlight the importance of targeted policy interventions aimed at strengthening monetary policy transmission and improving the effectiveness of the interest-rate channel across different lending segments.</jats:p>