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Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates

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  • Horvath, Roman
  • Kotlebova, Jana
  • Siranova, Maria

Abstract

We examine interest rate pass-through in the euro area over the 2008–2016 period and investigate the effects of financial market fragmentation, European Central Bank balance sheet policies and negative rates on the nature of pass-through. We use heterogeneous panel cointegration methods and bank interest rates for four different loan categories: small and large firm loans, housing loans and consumer loans. We find that interest rate pass-through is complete only for small firm loans; it is thus incomplete for other loan categories. Our results suggest that while interest rate pass-through has been weakened by higher sovereign credit risk, the European Central Bank's balance sheet policies helped curb these adverse effects on pass-through. Lower financial market fragmentation translated into lower lending rates. In addition, we fail to find evidence that bank interest rates became less responsive to market rates when market rates became negative.

Suggested Citation

  • Horvath, Roman & Kotlebova, Jana & Siranova, Maria, 2018. "Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates," Journal of Financial Stability, Elsevier, vol. 36(C), pages 12-21.
  • Handle: RePEc:eee:finsta:v:36:y:2018:i:c:p:12-21
    DOI: 10.1016/j.jfs.2018.02.003
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    1. repec:chb:bcchsb:v26c02pp013-042 is not listed on IDEAS
    2. repec:rba:rbaacv:acv2018-05 is not listed on IDEAS
    3. Anne Kathrin Funk, 2019. "Quantitative easing in the euro area and SMEs' access to finance: Who benefits the most?," IHEID Working Papers 02-2019, Economics Section, The Graduate Institute of International Studies.

    More about this item

    Keywords

    Interest rate pass-through; Fragmentation; Balance sheet policies; Negative rates;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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