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The Response of Retail Interest Rates to Factor Forecasts of Money Market Rates in Major European Economies

  • Anindya Banerjee
  • Victor Bystrov
  • Paul Mizen

The recent financial crisis has underlined that banks no longer simply accumulate deposits and lend a fraction to their clients. Instead they use interbank markets and structured finance to increase their loan book. This has implications for the understanding of interest rate pass through since a large number of interest rates and macro variables influence the retail rates they set on loans and deposits. This paper uses Stock-Watson factor forecasts to predict market interest rates which are then used as the basis for setting retail rates. We find a significant role for forecasts of future interest rates in determining short- and long-run pass through, and we argue that models which do not include future rates are misspecified.

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File URL: http://comisef.eu/files/wps025.pdf
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Paper provided by COMISEF in its series Working Papers with number 025.

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Length: 40 pages
Date of creation: 27 Jan 2010
Date of revision:
Handle: RePEc:com:wpaper:025
Contact details of provider: Web page: http://www.comisef.eu

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