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Interest Rate Pass-Through: Empirical Results for the Euro Area

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  • Gabe J. de Bondt
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    Abstract

    This paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2005.

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    Bibliographic Info

    Article provided by Verein für Socialpolitik in its journal German Economic Review.

    Volume (Year): 6 (2005)
    Issue (Month): 1 (02)
    Pages: 37-78

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    Handle: RePEc:bla:germec:v:6:y:2005:i:1:p:37-78

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    1. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
    2. Peter Winker, 1999. "Sluggish adjustment of interest rates and credit rationing: an application of unit root testing and error correction modelling," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 267-277.
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    8. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    9. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
    10. Peter Boswijk, H., 1994. "Testing for an unstable root in conditional and structural error correction models," Journal of Econometrics, Elsevier, vol. 63(1), pages 37-60, July.
    11. Bagliano, Fabio C. & Dalmazzo, Alberto & Marini, Giancarlo, 2000. "Bank competition and ECB's monetary policy," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 967-983, June.
    12. Marion Kohler & Erik Britton & Tony Yates, 2000. "Trade credit and the monetary transmission mechanism," Bank of England working papers 115, Bank of England.
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