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New evidence of heterogeneous bank interest rate pass-through in the euro area

Author

Listed:
  • Dominik Bernhofer
  • Till van Treeck

    () (IMK at the Hans Boeckler Foundation)

Abstract

We analyse the bank interest rate pass-through in the euro area for the period 1999:1 - 2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run passthrough. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the existence of the European Monetary Union.

Suggested Citation

  • Dominik Bernhofer & Till van Treeck, 2011. "New evidence of heterogeneous bank interest rate pass-through in the euro area," IMK Working Paper 12-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:12-2011
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    References listed on IDEAS

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    1. Gabe J. de Bondt, 2005. "Interest Rate Pass-Through: Empirical Results for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 37-78, February.
    2. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian A.R.J.M. van Rixtel, 2013. "Impact of bank competition on the interest rate pass-through in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(11), pages 1359-1380, April.
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    5. Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April.
    6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    7. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series 580, European Central Bank.
    8. Claudia Kwapil & Johann Scharler, 2006. "Limited Pass-Through from Policy to Retail Interest Rates: Empirical Evidence and Macroeconomic Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 26-36.
    9. Schwarzbauer, Wolfgang, 2006. "Financial Structure and its Impact on the Convergence of Interest Rate Pass-through in Europe. A Time-varying Interest Rate Pass-through Model," Economics Series 191, Institute for Advanced Studies.
    10. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
    11. Marotta, Giuseppe, 2009. "Structural breaks in the lending interest rate pass-through and the euro," Economic Modelling, Elsevier, vol. 26(1), pages 191-205, January.
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    Cited by:

    1. Pinter, Julien & Boissel, Charles, 2016. "The Eurozone deposit rates’ puzzle: Choosing the right benchmark," Economics Letters, Elsevier, vol. 148(C), pages 33-36.
    2. Groslambert, Bertrand & Chiappini, Raphaël & Bruno, Olivier, 2016. "Desperately seeking cash: Evidence from bank output measurement," Economic Modelling, Elsevier, vol. 59(C), pages 495-507.
    3. 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.
    4. 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.
    5. Holmes, Mark J. & Iregui, Ana María & Otero, Jesús, 2015. "Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks," Economic Modelling, Elsevier, vol. 49(C), pages 270-277.
    6. Dušan Staniek, 2016. "The Czech Crown Money Market as the Source for Pricing Customer Cash Products," European Financial and Accounting Journal, University of Economics, Prague, vol. 2016(3), pages 139-154.
    7. Aurélien Leroy & Yannick Lucotte, 2016. "Structural and Cyclical Determinants of Bank Interest-Rate Pass-Through in the Eurozone," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(2), pages 196-225, June.
    8. Gregor, Jiri & Melecky, Martin, 2018. "The Pass-Through of Monetary Policy Rate to Lending Rates: The Role of Macro-financial Factors," MPRA Paper 84048, University Library of Munich, Germany.
    9. repec:rbp:esteco:ree-33-01 is not listed on IDEAS

    More about this item

    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
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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