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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 will put under close scrutiny the monetary transmission process in the eurozone between 2003 and 2011. To this purpose, we investigate the interest rate pass-through from money market rates to various loan rates for up to twelve countries of the European Monetary Union. Applying a variety of cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). From these findings, we allow for different nonlinear patterns in the short-run dynamics of loan rates. Our investigation contributes to the literature mainly in two ways. On the one hand, we use fully harmonized data from the ECB’s MFI interest rate statistics and on the other hand, 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 loan adjustment are different for reductions and hikes of money market rates.

Suggested Citation

  • Ansgar Belke & Joscha Beckmann & Florian Verheyen, 2012. "Interest Rate Pass-Through in the EMU – New Evidence from Nonlinear Cointegration Techniques for Fully Harmonized Data," ROME Working Papers 201203, ROME Network.
    • Handle: RePEc:rmn:wpaper:2012105
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    More about this item

    Keywords

    Interest rate pass-through; EMU; cointegration; ARDL bounds testing; smooth transition models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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