Why Did Bank Lending Rates Diverge from Policy Rates After the Financial Crisis?

Anamaria Illes, Marco Lombardi and Paul Mizen

No 2015/05, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: After the global finance crisis short-term policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between policy rates and lending rates, how should central banks view the post-crisis transmission of policy to lending rates? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over policy rates. It suggests central banks should focus on the cost of bank liabilities more broadly to understand the dynamics of lending rates.

Keywords: lending rates; policy rates; panel cointegration; financial crisis (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (76)

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Working Paper: Why did bank lending rates diverge from policy rates after the financial crisis? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:15/05

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