Time-Varying Mark-Up and the ECB Monetary Policy Transmission in a Highly Non Linear Framework

Forthcoming International Review of Economics and Finance, doi:10.1016/j.iref.2016.06.001

Posted: 25 Jun 2016

See all articles by Giulio Cifarelli

Giulio Cifarelli

DISEI University of Florence

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: June 24, 2016

Abstract

This paper investigates the interest rate pass-through in eight European countries and allows for a mark-up which can be affected by country specific funding conditions and/or stochastic structural breaks. In the Southern European countries of the sample the long-run pass-through is directly affected by changes in banks’ cost of funding, due to shifts in the spread between domestic and German long-term government bond interest rates. In the same way, the ESTAR/LSTAR parameterization of the short-run dynamics brings about innovative results and identifies a crucial role for the government bond spreads in countries which were involved in the recent European debt crisis. This evidence suggests that the adoption by the ECB of unconventional monetary policies, such as the QE, by lowering the spreads, may reduce the fragmentation of the banking system in the Euro Area.

Keywords: Interest rate pass-through, Cointegration, ESTAR/LSTAR parameterization, EMU

JEL Classification: E43, E52, F36, C32

Suggested Citation

Cifarelli, Giulio and Paladino, Giovanna, Time-Varying Mark-Up and the ECB Monetary Policy Transmission in a Highly Non Linear Framework (June 24, 2016). Forthcoming International Review of Economics and Finance, doi:10.1016/j.iref.2016.06.001 . Available at SSRN: https://ssrn.com/abstract=2800117

Giulio Cifarelli

DISEI University of Florence ( email )

via delle Pandette 9
Florence 50127
Italy

Giovanna Paladino (Contact Author)

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121
Italy

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161
Italy

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