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Time-varying mark-up and the ECB monetary policy transmission in a highly non linear framework

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  • Cifarelli, Giulio
  • Paladino, Giovanna

Abstract

This paper investigates the interest rate pass-through in eight European countries and allows for a mark-up which can be affected by country specific funding conditions and/or stochastic structural breaks. In the Southern European countries of the sample the long-run pass-through is directly affected by changes in banks' cost of funding, due to shifts in the spread between domestic and German long-term government bond interest rates. In the same way, the ESTAR/LSTAR parameterization of the short-run dynamics brings about innovative results and identifies a crucial role for the government bond spreads in countries which were involved in the recent European debt crisis. This evidence suggests that the adoption by the ECB of unconventional monetary policies, such as the QE, by lowering the spreads, may reduce the fragmentation of the banking system in the Euro Area.

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  • Cifarelli, Giulio & Paladino, Giovanna, 2016. "Time-varying mark-up and the ECB monetary policy transmission in a highly non linear framework," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 247-262.
    • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:247-262
    DOI: 10.1016/j.iref.2016.06.001
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    More about this item

    Keywords

    Interest rate pass-through; Cointegration; ESTAR/LSTAR parameterization; EMU;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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