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The interest rate pass-through in the low interest rate environment: Evidence from Germany

Peter Hennecke

No 151, Thuenen-Series of Applied Economic Theory from University of Rostock, Institute of Economics

Abstract: In this paper it is shown that the ECB's main refinance rate, measured by various Taylor-rules, is far too low for Germany for over half a decade. That entails risks for the stability of Germany's financial system. How strong these risks materialize depends on the extent to which German banks pass on the low policy rates to their customers. In this paper, the interest rate pass-through in Germany in the low interest era is investigated using error-correction models for various bank interest rates. The results indicate a stronger short-term pass-through as well as diminished interest rate margins that weigh on banks' profits. However, there is no evidence for structural changes in the long-term relationship between policy rates and banks' interest rates. While the latter might be soothing for monetary policy makers, the former is rather a reason for concern.

Keywords: low interest rates; interest rate pass-through; interest rate channel (search for similar items in EconPapers)
JEL-codes: E43 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:roswps:151

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