Convergence in Eurozone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration

H. Sander, S. Kleimeier

Research output: Working paperProfessional

Abstract

This study aims at unifying the empirical research on the financial part of the monetary transmission process in the Eurozone between 1993 and 2002. After endogenously determining structural breaks, we select an optimal pass-through model for a series of national retail interest rates for each break-free sub-period. We apply these models to the pass-through of monetary policy shocks as measured by the overnight money market rate as well as to a measure of cost of funds and furthermore allow the pass-through process to be characterised by thresholds and asymmetries. We find that structural breaks occur on average well before EMU. We confirm the result of previous studies that report increases in size and speed of the pass-through. This finding holds, however, only when using the monetary policy rate proxy, indicating an increase in monetary policy efficiency. When using pass-through measures as an indicator for Eurozone banking market integration, the view that the markets are still fragmented is supported, with the possible exemption of short-term lending to enterprises. Finally, our analysis of the structural determinants of the pass-through process confirms the widely held view that nominal, real, and structural convergence can lead to a more homogenous transmission process in the Eurozone. However, full convergence may yet be precluded by legal and cultural differences.
Original languageEnglish
Place of PublicationMaastricht
PublisherMETEOR, Maastricht University School of Business and Economics
Number of pages39
Publication statusPublished - 1 Jan 2003

Publication series

SeriesMETEOR Research Memorandum
Number037
ISSN2666-8815

JEL classifications

  • e43 - Interest Rates: Determination, Term Structure, and Effects
  • e52 - Monetary Policy
  • e58 - Central Banks and Their Policies
  • f36 - Financial Aspects of Economic Integration

Keywords

  • interest rates
  • monetary policy
  • European Monetary Union
  • European Banking
  • Competition in banking
  • European financial integration
  • banking structure
  • asymmetric adjustment
  • cointegration analysis
  • threshold cointegration
  • structural breaks

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