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Time-varying cointegrating regression analysis with an application to the long-run interest rate pass-through in the Euro Area

Julio A. Afonso-Rodríguez () and María Santana-Gallego ()
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Julio A. Afonso-Rodríguez: Department of Applied Economics and Quantitative Methods, University of La Laguna
María Santana-Gallego: Department of Applied Economics, University of the Balearic Islands

Authors registered in the RePEc Author Service: Maria Santana Gallego ()

No 18-01, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: This paper study the mechanism of transmission between the money and the retail credit markets stated in terms of the long-run relationship between the harmonized interest rates for different credit categories and for a subset of countries of the EMU (European Monetary Union). This mechanism, known as the interest rate pass-through (IRPT) phenomenon, has been analyzed in many empirical studies using a variety of econometric techniques, for different samples of countries and periods of time, and the general conclusion is that the pass-through seems to be incomplete in the long-run. Except for a few recent works, the analysis is performed on the basis on a time-invariant long-run relationship which may not be appropriate in this case and could condition this result. To evaluate the robustness of these findings we extend the analysis through a non-linear model for the long-run relationship between the money and the retail markets that incorporates in a very flexible form, and with minimum requirements on tuning parameters, the nonlinearity in the form of time-varying parameters. To that end we follow the approach initiated in Bierens (1997) and also propose some new tools to test for the existence of a stable time-varying cointegration relationship. The results obtained seems to support the former evidence of an incomplete pass-through.

Keywords: retail interest rates; monetary policy; cointegration analysis; structural instability; time-varying cointegration (search for similar items in EconPapers)
JEL-codes: E52 F36 C22 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2018-01
New Economics Papers: this item is included in nep-eec, nep-ets and nep-mac
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