Convergence in Eurozone Retail Banking? What Interest Rate Pass-Through Tells Us about Monetary Policy Transmission, Competition and Integration

This study aims at unifying the empirical research on interest-rate pass-through in the euro zone. After endogenously determining structural breaks we select optimal pass-through models, which allow for thresholds and asymmetric adjustment. By applying these models to monetary policy shocks as well as cost-of-funds changes, we show that in post-break periods monetary policy transmission has become faster, that heterogeneity across the euro zone has decreased in some banking markets, and that more competition improves the pass-through predominantly in deposit markets. As national characteristics are still important pass-through determinants, convergence remains incomplete and monetary policy will continue to operate in a heterogeneous euro zone.