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Bank interest rate pass-through in the euro area: a cross country comparison

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Author Info
Christoffer Kok Sorensen () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Thomas Werner () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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Abstract

The present paper investigates the pass-through between market interest rates and bank interest rates in the euro area. Compared to the large interest rate pass-through literature the paper mainly improves upon two points. First, a novel data set, partially based on new harmonised ECB bank interest rate statistics is used. Moreover, the market rates are selected in a way to match the maturities of bank and market rates using information provided by the new statistics. Secondly, new panel-econometric methods are applied to test for heterogeneity in the pass-through process. The paper shows a large heterogeneity in the pass-through of market rates to bank rates between euro area countries and finally possible explanations of the heterogeneity are discussed. JEL Classification: E43; G21.

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Paper provided by European Central Bank in its series Working Paper Series with number 580.

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Length: 63 pages
Date of creation: Jan 2006
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Handle: RePEc:ecb:ecbwps:20060580

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Keywords: Interest rate pass-through euro area countries panel cointegration.

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Toolsema, Linda A. & Sturm, Jan-Egbert & Haan, Jakob de, 2002. "Convergence of pass-through from money market to lending rates in EMU countries: new evidence," CCSO Working Papers 200206, University of Groningen, CCSO Centre for Economic Research. [Downloadable!]
  3. Boris Hofmann & Paul Mizen, 2004. "Interest Rate Pass-Through and Monetary Transmission: Evidence from Individual Financial Institutions' Retail Rates," Economica, London School of Economics and Political Science, vol. 71, pages 99-123, 02. [Downloadable!] (restricted)
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  13. Rapach, David E. & Wohar, Mark E., 2004. "Testing the monetary model of exchange rate determination: a closer look at panels," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 867-895, October. [Downloadable!] (restricted)
  14. Inês Cabral & Frank Dierick & Jukka Vesala, 2002. "Banking integration in the euro area," Occasional Paper Series 06, European Central Bank. [Downloadable!]
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  16. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(3), pages 579-607.
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  17. Leonardo Gambacorta, 2004. "How Do Banks Set Interest Rates?," NBER Working Papers 10295, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  19. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September. [Downloadable!] (restricted)
  20. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
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  21. Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April. [Downloadable!] (restricted)
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  22. Jaebeom Kim, 2004. "Short run real exchange rate dynamics: a SUR approach," Applied Economics Letters, Taylor and Francis Journals, vol. 11(14), pages 909-913, November. [Downloadable!] (restricted)
  23. Tore Ellingsen & Ulf Soderstrom, 2001. "Monetary Policy and Market Interest Rates," American Economic Review, American Economic Association, vol. 91(5), pages 1594-1607, December. [Downloadable!] (restricted)
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  1. Rocío Betancourt & Hernando Vargas & Norberto Rodríguez Niño, 2006. "Interest Rate Pass-Through In Colombia: A Micro- Banking Perspective," BORRADORES DE ECONOMIA 002909, BANCO DE LA REPÚBLICA. [Downloadable!]
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