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Retail bank interest rate pass-through: new evidence at the euro area level

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  • de Bondt, Gabe
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    Abstract

    This paper presents an error-correction model of the interest rate pass-through process based on a marginal cost pricing framework including switching and asymmetric information costs. Estimation results for the euro area suggest that the proportion of the pass-through of changes in market interest rates to bank deposit and lending rates within one month is at its highest around 50%. The interest rate pass-through is higher in the long term and notably for bank lending rates close to 100%. Moreover, a cointegration relation exists between retail bank and comparable market interest rates. Robustness checks, consisting of impulse responses based on VAR models and results for a sub-sample starting in January 1999, show qualitatively similar findings. However, the sub-sample results are supportive of a quicker pass-through process since the introduction of the euro. JEL Classification: E43, G21

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0136.

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    Date of creation: Apr 2002
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    Handle: RePEc:ecb:ecbwps:20020136

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    Keywords: euro area; market interest rates; retail bank interest rates;

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