Heterogeneous Monetary Transmission Process in the Eurozone: Does Banking Competition Matter?

NBP Working Paper No. 171

46 Pages Posted: 15 Mar 2014 Last revised: 22 Feb 2015

See all articles by Aurélien Leroy

Aurélien Leroy

LAREFI, University of Bordeaux

Yannick Lucotte

PSB Paris School of Business

Date Written: March 3, 2014

Abstract

This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. We use an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.

Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model

JEL Classification: C23; D4; E43; E52; G21; L10

Suggested Citation

Leroy, Aurélien and Lucotte, Yannick, Heterogeneous Monetary Transmission Process in the Eurozone: Does Banking Competition Matter? (March 3, 2014). NBP Working Paper No. 171, Available at SSRN: https://ssrn.com/abstract=2408417 or http://dx.doi.org/10.2139/ssrn.2408417

Aurélien Leroy (Contact Author)

LAREFI, University of Bordeaux ( email )

Avenue Léon Duguit
Pessac, Centre 33400
France

Yannick Lucotte

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

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