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The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises

Author

Listed:
  • S. Avouyi-Dovi
  • G. Horny
  • Patrick Sevestre

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

We analyse the dynamics of the pass-through of banks' marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain. We measure banks' marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks' risks. We focus on the interest rate on new short-term loans granted to non-financial corporations in these countries. Our analysis is based on an error-correction approach that we extend to handle the time-varying long-run relationship between banks' lending rates and banks' marginal cost, as well as stochastic volatility. Our application is based on a harmonised monthly database from January 2003 to October 2014. We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC).We reject the view that the transmission mechanism is permanent over time. The long-run relationship moved with the sovereign debt crises to a new one, with a slower pass-through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.

Suggested Citation

  • S. Avouyi-Dovi & G. Horny & Patrick Sevestre, 2017. "The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises," Post-Print hal-01657075, HAL.
    • Handle: RePEc:hal:journl:hal-01657075
    DOI: 10.1016/j.jbankfin.2015.04.020
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    Cited by:

    1. Avouyi-Dovi, S. & Lecat, R. & O’Donnell, C. & Bureau, B. & Villetelle, J-P., 2016. "Are insolvent firms being kept afloat by excessively low interest rates?," Rue de la Banque, Banque de France, issue 29, september.
    2. Henry Penikas, 2023. "Smoothing the Key Rate Pass-Through: What to Keep in Mind When Interpreting Econometric Estimates," Russian Journal of Money and Finance, Bank of Russia, vol. 82(3), pages 3-34, September.
    3. Michaelis, Henrike, 2024. "Changes in the euro area interest rate pass-through," Discussion Papers 21/2024, Deutsche Bundesbank.
    4. David Byrne & Robert Kelly, 2019. "Bank asset quality & monetary policy pass-through," Applied Economics, Taylor & Francis Journals, vol. 51(23), pages 2501-2521, May.
    5. Domonkos, Tomas & Fisera, Boris & Siranova, Maria, 2023. "Income inequality as long-term conditioning factor of monetary transmission to bank rates," Economic Modelling, Elsevier, vol. 128(C).
    6. Kelly, Robert & Byrne, David, 2019. "Bank asset quality and monetary policy pass-through," ESRB Working Paper Series 98, European Systemic Risk Board.
    7. Holton, Sarah & Rodriguez d’Acri, Costanza, 2018. "Interest rate pass-through since the euro area crisis," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 277-291.
    8. Angelo Ranaldo & Benedikt Ballensiefen & Hannah Winterberg, 2020. "Monetary policy disconnect," Working Papers on Finance 2003, University of St. Gallen, School of Finance.
    9. Romain Baeriswyl & Lucas Marc Fuhrer & Petra Gerlach & Jörn Tenhofen, 2021. "The dynamics of bank rates in a negative-rate environment - the Swiss case," Working Papers 2021-05, Swiss National Bank.
    10. Lahura, Erick, 2017. "El efecto traspaso de la tasa de interés de política monetaria en Perú: evidencia reciente," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 33, pages 9-27.
    11. Demiralp, Selva & Eisenschmidt, Jens & Vlassopoulos, Thomas, 2021. "Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area," European Economic Review, Elsevier, vol. 136(C).
    12. Robert Ferstl & Bernhard Graf & Claudia Kwapil, 2024. "The pass-through of policy interest rates to bank retail rates in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/23, pages 41-59.
    13. Horvath, Roman & Kotlebova, Jana & Siranova, Maria, 2018. "Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates," Journal of Financial Stability, Elsevier, vol. 36(C), pages 12-21.
    14. Egorov, Aleksei V. (Егоров, Алексей В.) & Borzykh, Olga A. (Борзых, Ольга А.), 2018. "Asymmetric Interest Rate Pass-Through in Russia [Асимметрия Процентного Канала Денежной Трансмиссии В России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 92-121, February.
    15. Elyasiani, Elyas & Movaghari, Hadi, 2024. "Money demand function with time-varying coefficients," The Quarterly Review of Economics and Finance, Elsevier, vol. 98(C).

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    Keywords

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    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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