The Response of Retail Interest Rates to Factor Forecasts of Money Market Rates in Major European Economies

Anindya Banerjee, Victor Bystrov and Paul Mizen

No 25, Working Papers from COMISEF

Abstract: The recent financial crisis has underlined that banks no longer simply accumulate deposits and lend a fraction to their clients. Instead they use interbank markets and structured finance to increase their loan book. This has implications for the understanding of interest rate pass through since a large number of interest rates and macro variables influence the retail rates they set on loans and deposits. This paper uses Stock-Watson factor forecasts to predict market interest rates which are then used as the basis for setting retail rates. We find a significant role for forecasts of future interest rates in determining short- and long-run pass through, and we argue that models which do not include future rates are misspecified.

Keywords: forecasting; factor models; interest rate pass-through (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-01-27
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (4)

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