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The interest rate pass-through in the Euro area during the global financial crisis
Affiliation:1. European Central Bank, Sonnemannstrasse 20, D-60314 Frankfurt am Main, Germany;2. Kelley School of Business, Indiana University, 1275 E 10th St, Bloomington, IN 47405, United States;1. Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore, 18 Evans Road, Singapore 259364, Singapore;2. Lee Kuan Yew School of Public Policy, National University of Singapore, 469C Bukit Timah Road, Singapore 259772, Singapore
Abstract:This paper uses panel vector autoregressive (VAR) models for euro area member countries to explore the widening of retail bank interest rate spreads that emerged in the course of the global financial crisis. We find that the interest rate pass-through was generally complete on impact before the outbreak of the financial crisis, but became significantly distorted in the period thereafter, which hampered the effectiveness of monetary policy. Empirical evidence suggests that the decrease in the interest rate pass-through can be related to a change in the structural parameters characterizing the economies and a substantial increase in the average size of structural shocks. DSGE model simulations show that an increase in the frictions that banks are subject to can explain the decrease in the retail bank interest rate pass-through.
Keywords:Euro area  Interest rate pass-through  Global financial crisis  Panel vector autoregressive model  Sign restrictions
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