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Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates

Roman Horvath, Jana Kotlebova and Mária Širaňová ()

Journal of Financial Stability, 2018, vol. 36, issue C, 12-21

Abstract: We examine interest rate pass-through in the euro area over the 2008–2016 period and investigate the effects of financial market fragmentation, European Central Bank balance sheet policies and negative rates on the nature of pass-through. We use heterogeneous panel cointegration methods and bank interest rates for four different loan categories: small and large firm loans, housing loans and consumer loans. We find that interest rate pass-through is complete only for small firm loans; it is thus incomplete for other loan categories. Our results suggest that while interest rate pass-through has been weakened by higher sovereign credit risk, the European Central Bank's balance sheet policies helped curb these adverse effects on pass-through. Lower financial market fragmentation translated into lower lending rates. In addition, we fail to find evidence that bank interest rates became less responsive to market rates when market rates became negative.

Keywords: Interest rate pass-through; Fragmentation; Balance sheet policies; Negative rates (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:36:y:2018:i:c:p:12-21

DOI: 10.1016/j.jfs.2018.02.003

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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