Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter?

Aurélien Leroy and Yannick Lucotte
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Yannick Lucotte: ESG Management School; Department of Economics,

No 171, NBP Working Papers from Narodowy Bank Polski

Abstract: This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.

Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model (search for similar items in EconPapers)
JEL-codes: C23 D4 E43 E52 G21 L10 (search for similar items in EconPapers)
Pages: 46
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:171

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