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New evidence of heterogeneous bank interest rate pass-through in the euro area

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  • Bernhofer, Dominik
  • van Treeck, Till

Abstract

We analyse the bank interest rate pass-through in the euro area for the period 1999:1–2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run pass-through. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the period since the founding of the European Monetary Union.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 418-429

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Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:418-429

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Interest rate pass-through; European Monetary Union; European financial integration; Cointegration analysis; Panel data analysis;

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  1. Gabe J. de Bondt, 2005. "Interest Rate Pass-Through: Empirical Results for the Euro Area," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 6(1), pages 37-78, 02.
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  4. Marotta, Giuseppe, 2009. "Structural breaks in the lending interest rate pass-through and the euro," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 191-205, January.
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  6. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(7), pages 1839-1870, July.
  7. Claudia Kwapil & Johann Scharler, 2006. "Limited Pass-Through from Policy to Retail Interest Rates: Empirical Evidence and Macroeconomic Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 26–36.
  8. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  9. Sander,Harald & Kleimeier,Stefanie, 2003. "Convergence in Eurozone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  10. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series, European Central Bank 0580, European Central Bank.
  11. de Bondt, Gabe & Mojon, Benoît & Valla, Natacha, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series, European Central Bank 0518, European Central Bank.
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