Structural Breaks in the Lending Interest Rate Pass-Through and the Euro
31 Pages Posted: 17 Jan 2007 Last revised: 20 Nov 2008
Date Written: December 1, 2007
Abstract
This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. This results runs against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating to more recent periods these findings is suggested by the differences between the unharmonized and the new harmonized retail rates.
Keywords: Interest rates, Monetary policy, European Monetary Union (EMU), Cointegration analysis, Taylor principle
JEL Classification: E43, E52, E58, F36
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Bank Concentration and Retail Interest Rates
By Sandrine Corvoisier and Reint Gropp
-
Financial Structure and the Interest Rate Channel of ECB Monetary Policy
By Benoit Mojon
-
Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy
-
The Response of Short-Term Bank Lending Rates to Policy Rates: A Cross-Country Perspective
By Claudio E. V. Borio and Wilhelm Fritz
-
By Harald Sander and Stefanie Kleimeier
-
Bank Lending Rates and Financial Structure in Italy: A Case Study
By Carlo Cottarelli, Giovanni Ferri, ...
-
Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level
-
The Pass-Through from Market Interest Rates to Bank Lending Rates in Germany