Credit risk and monetary pass-through—Evidence from Chile

This study presents a novel way to measure changes in commercial banks’ credit risk based on higher-order moments of the interest rate distribution. These measures are employed as control variables to investigate the pass-through of changes in the monetary policy rates (MPR) to retail banks’ lending rates to firms. Applying a multivariate framework it is shown that the introduced credit risk measures are statistically significant and have the expected signs. In this context, the pass-through is symmetric and complete in the short run. No evidence indicates that expectations of MPR changes matter for banks’ lending rates in Chile and robustness analyses indicate that neither do macroeconomic factors. The results suggest that credit risk should be taken into account when evaluating changes in banks’ lending rates and higher-order moments of the interest rate distribution are suitable for measuring changes in this risk.