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The Interest Rate Pass-Through in the Euro Area During the Global Financial Crisis

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  • Nikolay Hristov
  • Oliver Hülsewig
  • Timo Wollmershäuser

Abstract

This paper uses panel vector autoregressive models and simulations of an estimated DSGE model to explore the reaction of Euro–area banks to the global financial crisis. We focus on their interest–rate setting behavior in response to standard macroeconomic shocks. Our main empirical finding is that the pass–through from changes in the money market rate to retail bank rates became significantly less complete during the crisis. Model simulations show that this result can be well explained by a significant increase in the frictions that the banks’ business is subject to.

Suggested Citation

  • Nikolay Hristov & Oliver Hülsewig & Timo Wollmershäuser, 2012. "The Interest Rate Pass-Through in the Euro Area During the Global Financial Crisis," CESifo Working Paper Series 3964, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3964
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    Cited by:

    1. Helen Louri & Petros M. Migiakis, 2016. "Bank Lending Margins in the Euro Area: The Effects of Financial Fragmentation and ECB Policies," LEQS – LSE 'Europe in Question' Discussion Paper Series 105, European Institute, LSE.
    2. Nikolay Hristov & Oliver Hülsewig & Thomas Siemsen & Timo Wollmershäuser, 2014. "Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB's OMT Program," CESifo Working Paper Series 4628, CESifo Group Munich.
    3. Perera, Anil & Wickramanayake, J., 2016. "Determinants of commercial bank retail interest rate adjustments: Evidence from a panel data model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 1-20.
    4. Anindya Banerjee & Victor Bystrov & Paul Mizen, 2017. "Structural Factor Analysis of Interest Rate Pass Through In Four Large Euro Area Economies," Working Papers in Economics 17/07, University of Canterbury, Department of Economics and Finance.
    5. Holton, Sarah & Rodriguez d’Acri, Costanza, 2015. "Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-through Fragmentation during the Euro Area Crisis," Research Technical Papers 01/RT/15, Central Bank of Ireland.
    6. von Borstel, Julia & Eickmeier, Sandra & Krippner, Leo, 2016. "The interest rate pass-through in the euro area during the sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 386-402.
    7. Liu, Guan-Chun & Lee, Chien-Chiang & Lee, Chi-Chuan, 2016. "The nexus between insurance activity and economic growth: A bootstrap rolling window approach," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 299-319.
    8. Buchholz, Manuel & Schmidt, Kirsten & Tonzer, Lena, 2017. "Do conventional monetary policy instruments matter in unconventional times?," IWH Discussion Papers 12/2017, Halle Institute for Economic Research (IWH).
    9. Havranek, Tomas & Irsova, Zuzana & Lesanovska, Jitka, 2016. "Bank efficiency and interest rate pass-through: Evidence from Czech loan products," Economic Modelling, Elsevier, vol. 54(C), pages 153-169.
    10. Avouyi-Dovi, S. & Horny, G. & Sevestre, P., 2017. "The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 79(C), pages 74-94.
    11. Darracq-Paries, Matthieu & De Santis, Roberto A., 2015. "A non-standard monetary policy shock: The ECB's 3-year LTROs and the shift in credit supply," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 1-34.
    12. Michal Popiel, 2016. "Interest rate pass-through: a nonlinear vector error-correction approach," Working Papers 1352, Queen's University, Department of Economics.
    13. Hennecke, Peter, 2017. "The interest rate pass-through in the low interest rate environment: Evidence from Germany," Thuenen-Series of Applied Economic Theory 151, University of Rostock, Institute of Economics.
    14. Byrne, David & Kelly, Robert & O'Toole, Conor, 2017. "How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market," Research Technical Papers 04/RT/17, Central Bank of Ireland.
    15. Carlo Altavilla & Fabio Canova & Matteo Ciccarelli, 2016. "Mending the broken link: heterogeneous bank lending and monetary policy pass-through," Working Papers No 9/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    16. Groslambert, Bertrand & Chiappini, Raphaël & Bruno, Olivier, 2016. "Desperately seeking cash: Evidence from bank output measurement," Economic Modelling, Elsevier, pages 495-507.
    17. Holton, Sarah & Rodriguez d'Acri, Costanza, 2015. "Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis," Working Paper Series 1850, European Central Bank.
    18. repec:dau:papers:123456789/15030 is not listed on IDEAS
    19. Boris Blagov & Michael Funke & Richhild Moessner, 2015. "Modelling the time-variation in euro area lending spreads," BIS Working Papers 526, Bank for International Settlements.
    20. Andries, Natalia & Billon, Steve, 2016. "Retail bank interest rate pass-through in the euro area: An empirical survey," Economic Systems, Elsevier, vol. 40(1), pages 170-194.
    21. Byrne, David & Kelly, Robert, 2017. "Bank Asset Quality & Monetary Policy Pass-Through," Research Technical Papers 11/RT/17, Central Bank of Ireland.
    22. Arnold, Ivo J.M. & van Ewijk, Saskia E., 2014. "A state space approach to measuring the impact of sovereign and credit risk on interest rate convergence in the euro area," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 340-357.
    23. Anamaria Illes & Marco Lombardi & Paul Mizen, 2015. "Why did bank lending rates diverge from policy rates after the financial crisis?," BIS Working Papers 486, Bank for International Settlements.

    More about this item

    Keywords

    Euro Area; global financial crisis; interest rate pass-through; panel vector autoregressive model; sign restrictions; structural break; DSGE model;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • 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

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