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New evidence of heterogeneous bank interest rate pass-through in the euro area

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  • Dominik Bernhofer
  • Till van Treeck

    ()
    (IMK at the Hans Boeckler Foundation)

Abstract

We analyse the bank interest rate pass-through in the euro area for the period 1999:1 - 2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run passthrough. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the existence of the European Monetary Union.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 12-2011.

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Length: 15 pages
Date of creation: 2011
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Handle: RePEc:imk:wpaper:12-2011

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  1. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers, Lund University, Department of Economics 2005:11, Lund University, Department of Economics.
  2. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  3. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian van Rixtel, 2008. "Impact of bank competition on the interest rate pass-through in the euro area," Banco de Espa�a Working Papers, Banco de Espa�a 0828, Banco de Espa�a.
  4. de Bondt, Gabe & Mojon, Benoît & Valla, Natacha, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series, European Central Bank 0518, European Central Bank.
  5. Gabe J. de Bondt, 2005. "Interest Rate Pass-Through: Empirical Results for the Euro Area," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 6(1), pages 37-78, 02.
  6. Giuseppe Marotta, 2008. "Structural breaks in the lending interest rate pass-through and the euro," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance), Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" 08031, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  7. Claudia Kwapil & Johann Scharler, 2006. "Limited Pass-Through from Policy to Retail Interest Rates: Empirical Evidence and Macroeconomic Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 26–36.
  8. Franklin Allen & Douglas Gale, 2003. "Financial Intermediaries and Markets," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series, European Central Bank 0580, European Central Bank.
  10. 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, Elsevier, vol. 23(3), pages 461-492, April.
  11. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(7), pages 1839-1870, July.
  12. Schwarzbauer, Wolfgang, 2006. "Financial Structure and its Impact on the Convergence of Interest Rate Pass-through in Europe. A Time-varying Interest Rate Pass-through Model," Economics Series, Institute for Advanced Studies 191, Institute for Advanced Studies.
  13. Stephen Rousseas, 1985. "A Markup Theory of Bank Loan Rates," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 8(1), pages 135-144, October.
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