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Interest rate pass-through in the EMU – New evidence from nonlinear cointegration techniques for fully harmonized data

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  • Belke, Ansgar
  • Beckmann, Joscha
  • Verheyen, Florian

Abstract

This study analyzes the interest rate pass-through (IRPT) from money market rates to various loan rates for up to 12 countries of the European Monetary Union (EMU) between 2003 and 2011 based on fully harmonized data. We first test for a cointegrating relationship between loan rates and the Euro OverNight Index Average (EONIA) and allow for different nonlinear patterns in the short-run adjustment of loan rates based on smooth transition models. Our results identify considerable differences in the size of the pass-through (PT) with respect to different loan rates or countries. In the majority of cases, the pass-through is incomplete, and the dynamics of loan adjustment are different for reductions and hikes in money market rates. A key finding is that the pass-through is more homogenous and more nearly complete for loans to non-financial corporations than to households.

Suggested Citation

  • Belke, Ansgar & Beckmann, Joscha & Verheyen, Florian, 2013. "Interest rate pass-through in the EMU – New evidence from nonlinear cointegration techniques for fully harmonized data," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 1-24.
    • Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:1-24
    DOI: 10.1016/j.jimonfin.2013.05.006
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    More about this item

    Keywords

    Interest rate pass-through; EMU; Cointegration; ARDL bounds testing; Smooth transition models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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