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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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  • Ansgar Belke
  • Joscha Beckmann
  • Florian Verheyen

Abstract

This study puts the monetary transmission process in the eurozone between 2003 and 2011 under closer scrutiny. For this purpose, we investigate the interest rate pass-through from money market to various loan rates for up to twelve countries of the European Monetary Union. Applying different cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). Based on these findings, we allow for different nonlinear patterns for short-run dynamics of loan rates. Our investigation contributes to the literature in mainly two ways. On the one hand, we use fully harmonized data stemming from the ECB's MFI interest rate statistics. In addition, we consider smooth transition models as an extension of conventional threshold models. Our results point to considerable differences in the size of the pass-through with respect to either different loan rates or countries. In the majority of cases, the pass-through is incomplete and the dynamics of loans adjustment are different for reductions and hikes of money market rates.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1223.

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Length: 27 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1223

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Keywords: interest rate pass-through; EMU; cointegration; ARDL bounds testing; smooth transition models;

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Cited by:
  1. Jérôme Creel & Mathilde Viennot & Paul Hubert, 2013. "Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies," Sciences Po publications, Sciences Po 2013-25, Sciences Po.
  2. Ansgar Belke & Christian Dreger, 2013. "The Transmission of Oil and Food Prices to Consumer Prices – Evidence for the MENA Countries," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0448, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Jan Bruha & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava & Petr Kral & Ivana Kubicova & Ji, 2013. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2013," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, Czech National Bank, Research Department, number as13 edited by Jakub Mateju & Kamila Kulhava, August.
  4. Ivo Arnold & Saskia van Ewijk, 2014. "The impact of sovereign and credit risk on interest rate convergence in the euro area," DNB Working Papers, Netherlands Central Bank, Research Department 425, Netherlands Central Bank, Research Department.

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