Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level

43 Pages Posted: 20 Jan 2003

Date Written: April 2002

Abstract

This paper presents an error-correction model of the interest rate pass-through process based on a marginal cost pricing framework including switching and asymmetric information costs. Estimation results for the euro area suggest that the proportion of the pass-through of changes in market interest rates to bank deposit and lending rates within one month is at its highest around 50%. The interest rate pass-through is higher in the long term and notably for bank lending rates close to 100%. Moreover, a cointegration relation exists between retail bank and comparable market interest rates. Robustness checks, consisting of impulse responses based on VAR models and results for a sub-sample starting in January 1999, show qualitatively similar findings. However, the sub-sample results are supportive of a quicker pass-through process since the introduction of the euro.

Keywords: Retail bank interest rates, market interest rates, euro area

JEL Classification: E43, G21

Suggested Citation

de Bondt, Gabe, Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level (April 2002). Available at SSRN: https://ssrn.com/abstract=357380 or http://dx.doi.org/10.2139/ssrn.357380

Gabe De Bondt (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 13440 (Phone)
+44 69 1344 6000 (Fax)

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