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Monetary and banking policy transmission through interest rates: an empirical application to the USA, Canada, the UK and the Eurozone

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  • Yannis Panagopoulos
  • Ioanna Reziti
  • Aristotelis Spiliotis

Abstract

The main purpose of this paper is an examination of the pass-through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass-through interest rate margin or mark-up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass-through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error-correction procedure (ECM-GE) is implemented for the wholesale interest rate selection. Then an LSE-Hendry general-to-specific model (GETS) is applied, for the revelation of the banking sector pass-through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass-through behaviour, with market structure implication - namely, the US and UK banking systems contrasted with Canada-Eurozone.

Suggested Citation

  • Yannis Panagopoulos & Ioanna Reziti & Aristotelis Spiliotis, 2010. "Monetary and banking policy transmission through interest rates: an empirical application to the USA, Canada, the UK and the Eurozone," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(2), pages 119-136.
    • Handle: RePEc:taf:irapec:v:24:y:2010:i:2:p:119-136
    DOI: 10.1080/02692171003590096
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    References listed on IDEAS

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    1. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
    2. Ms. Angeliki Kourelis & Mr. Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 1994/039, International Monetary Fund.
    3. Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
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    2. Jose A. Zabala & Maria A. Prats, 2020. "The unconventional monetary policy of the European Central Bank: Effectiveness and transmission analysis," The World Economy, Wiley Blackwell, vol. 43(3), pages 794-809, March.
    3. Jérôme Creel & Paul Hubert & Mathilde Viennot, 2016. "The effect of ECB monetary policies on interest rates and volumes," Applied Economics, Taylor & Francis Journals, vol. 48(47), pages 4477-4501, October.
    4. repec:hal:wpspec:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h is not listed on IDEAS
    5. Jiri Gregor & Jan Janku & Martin Melecky, 2022. "From Central Counter to Local Living: Pass-Through of Monetary Policy to Mortgage Lending Rates in Districts," Working Papers 2022/9, Czech National Bank.
    6. 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).
    7. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h is not listed on IDEAS
    8. repec:hal:spmain:info:hdl:2441/1plbkk1i83dqp9vh69uffirf is not listed on IDEAS
    9. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h is not listed on IDEAS
    10. A.H. Ahmad & Nusrate Aziz & Shahina Rummun, 2013. "Interest Rate Pass-Through in the UK: Has the Transmission Mechanism Changed During the Financial Crisis?," Economic Issues Journal Articles, Economic Issues, vol. 18(1), pages 17-38, March.
    11. repec:spo:wpmain:info:hdl:2441/7erap6chdi854b9ao9a3v1e9b9 is not listed on IDEAS
    12. Özgür ERSİN & Melike BİLDİRİCİ, 2017. "A Nonlinear Analysis of Monetary Policy with Dominance Indices in Turkey: MS-VAR Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 22-46, December.
    13. Gan-Ochir Doojav & Kaliappa Kalirajan, 2016. "Interest Rate Pass-Through in Mongolia," The Developing Economies, Institute of Developing Economies, vol. 54(4), pages 271-291, December.

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