The Response of Retail Interest Rates to Factor Forecasts of Money Market Rates in Major European Economies
AbstractThe recent financial crisis has underlined that banks no longer simply accumulate deposits and lend a fraction to their clients. Instead they use interbank markets and structured finance to increase their loan book. This has implications for the understanding of interest rate pass through since a large number of interest rates and macro variables influence the retail rates they set on loans and deposits. This paper uses Stock-Watson factor forecasts to predict market interest rates which are then used as the basis for setting retail rates. We find a significant role for forecasts of future interest rates in determining short- and long-run pass through, and we argue that models which do not include future rates are misspecified.
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Bibliographic InfoPaper provided by COMISEF in its series Working Papers with number 025.
Length: 40 pages
Date of creation: 27 Jan 2010
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Web page: http://www.comisef.eu
forecasting; factor models; interest rate pass-through;
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- Jan Bruha, 2011. "Retail Credit Premiums and Macroeconomic Developments," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2010/2011, chapter 0, pages 133-140 Czech National Bank, Research Department.
- David ARISTEI & Manuela Gallo, 2012. "Interest Rate Pass-Through in the Euro Area during the Financial Crisis: a Multivariate Regime-Switching Approach," Quaderni del Dipartimento di Economia, Finanza e Statistica 107/2012, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
- Iva Cecchin, 2011. "Mortgage Rate Pass-Through in Switzerland," Working Papers 2011-08, Swiss National Bank.
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