Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-Through Fragmentation During the Euro Area Crisis

61 Pages Posted: 24 Sep 2015

See all articles by Sarah Holton

Sarah Holton

European Central Bank (ECB)

Costanza Rodriguez d’Acri

European Central Bank (ECB)

Date Written: September 22, 2015

Abstract

The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy.

Keywords: Interest rate pass-through, monetary policy transmission, financial crises

JEL Classification: E52, E58, G01, G20, E43

Suggested Citation

Holton, Sarah and d’Acri, Costanza Rodriguez, Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-Through Fragmentation During the Euro Area Crisis (September 22, 2015). ECB Working Paper No. 1850, Available at SSRN: https://ssrn.com/abstract=2664161 or http://dx.doi.org/10.2139/ssrn.2664161

Sarah Holton (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Costanza Rodriguez D’Acri

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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