Has the Transmission of Policy Rates to Lending Rates Been Impaired by the Global Financial Crisis?

18 Pages Posted: 7 Jan 2015

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Annamaria Illes

Bank for International Settlements (BIS)

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 2014

Abstract

Central banks of major advanced economies have maintained a very accommodative monetary policy stance in the last few years. However, concerns have surfaced that the transmission of low policy rates to lending rates has been weaker than in the past. Has the transmission of policy rates to lending rates been impaired by the Global Financial Crisis? To answer this question, we first estimate standard cointegrating equations linking policy and lending rates for non-financial firms in Italy, Spain, United Kingdom and United States. We then test for structural change in the cointegration parameters, reporting strong evidence of a break after Lehman Brothers' default. Such structural break is due to a strong increase in the mark-up between the lending rate and the policy rate that standard models assume constant in the long run. The structural shift is explained by compounding the lending rate equation with measures of risk.

Keywords: monetary policy, lending rates, cointegration, global financial crisis

JEL Classification: E43, E52, C32

Suggested Citation

Gambacorta, Leonardo and Illes, Annamaria and Lombardi, Marco Jacopo, Has the Transmission of Policy Rates to Lending Rates Been Impaired by the Global Financial Crisis? (December 2014). BIS Working Paper No. 477, Available at SSRN: https://ssrn.com/abstract=2542221

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Annamaria Illes

Bank for International Settlements (BIS) ( email )

No Address Available

Marco Jacopo Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

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