Long-Run Retail Interest Rate Pass-Through In The Euro Area: The Effect Of The Financial Crisis

Abstract

This paper analyzes the long-run pass-through of money market rates to retail interest rates (both lending and deposit rates).  We rely on fully harmonized data from MIR statistics (MFI Interest Rates) for 8 countries of the euro area. From January 2003 to February 2014, interest rates are observed on a monthly basis on new contracts related to the three largest segments of the banking market (consumer, mortgage, and Non-Financial Corporations - NFCs). The long-term pass-through is measured following the Phillips and Loretan (PL) approach which is proved to be more effective than the Engle-Granger OLS (EG-OLS) approach.  We also investigate the effect of the financial crisis on the degree of the long-run pass-through. Results suggest that the financial crisis deepens the heterogeneity of the speed and degree of the bank rates adjustment mechanism. Moreover, within the same country, the characteristics of long-run pass-through differ both among banking products and time horizon.