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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.

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File URL: http://www.rome-net.org/RePEc/rmn/wpaper/rome-wp-2012-05.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by ROME Network in its series ROME Working Papers with number 201203.

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Length: 34 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:rmn:wpaper:2012105

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Web page: http://www.rome-net.org

Related research

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

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Cited by:
  1. Jérôme Creel & Paul Hubert & Mathilde Viennot, 2013. "Assessing the interest rate and bank lending channels of ECB monetary policies," Documents de Travail de l'OFCE 2013-25, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. 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, number as13 edited by Jakub Mateju & Kamila Kulhava, August.
  3. Ivo Arnold & Saskia van Ewijk, 2014. "The impact of sovereign and credit risk on interest rate convergence in the euro area," DNB Working Papers 425, Netherlands Central Bank, Research Department.
  4. Ansgar Belke & Christian Dreger, 2013. "The Transmission of Oil and Food Prices to Consumer Prices – Evidence for the MENA Countries," Ruhr Economic Papers 0448, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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