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Retail bank interest rate pass-through: new evidence at the euro area level

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  • de Bondt, Gabe

Abstract

This paper presents an error-correction model of the interest rate pass-through process based on a marginal cost pricing framework including switching and asymmetric information costs. Estimation results for the euro area suggest that the proportion of the pass-through of changes in market interest rates to bank deposit and lending rates within one month is at its highest around 50%. The interest rate pass-through is higher in the long term and notably for bank lending rates close to 100%. Moreover, a cointegration relation exists between retail bank and comparable market interest rates. Robustness checks, consisting of impulse responses based on VAR models and results for a sub-sample starting in January 1999, show qualitatively similar findings. However, the sub-sample results are supportive of a quicker pass-through process since the introduction of the euro. JEL Classification: E43, G21

Suggested Citation

  • de Bondt, Gabe, 2002. "Retail bank interest rate pass-through: new evidence at the euro area level," Working Paper Series 0136, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20020136
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    References listed on IDEAS

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    More about this item

    Keywords

    euro area; market interest rates; retail bank interest rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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