One size does not fit all. A non-linear analysis of European monetary transmission

Giulio Cifarelli () and Giovanna Paladino

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: This paper investigates the interest rate pass-through in eight European countries analyzing their short-run and long-run monetary transmission mechanisms. We investigate the relationship between the Euribor and the long-run interest rate on loans to non-financial corporations and allow for a mark-up which can be affected by country specific funding conditions and/or stochastic structural breaks. We detect significant differences across countries. Cointegration between the Euribor and the long-term bank loan interest rates holds for Germany, France, and the Netherlands, where banks seem to apply a constant mark-up. In the remaining countries of the sample the long-run pass-through is directly affected by changes in banks’ cost of funding, due to shifts in the spread between domestic and German long-term government bond interest rates. The selection of the country specific ESTAR/LSTAR parameterization of the short-run dynamics detects a high degree of heterogeneity. The transition variables vary from the government bond spreads, in countries which were involved in the European debt crisis via sovereign bond market contagion, to the VXO index and to the Euribor monthly volatility.

Keywords: Interest rate pass-through; Cointegration; ESTAR/LSTAR parameterization; EMU. (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 F36 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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