Bank Interest Rate Pass-Through in the Euro Area: A Cross Country Comparison

TLDR

Interest‑rate pass‑through studies have largely focused on a few aspects, but this paper expands the literature. The present paper investigates the pass‑through between market interest rates and bank interest rates in the euro area. The authors use a novel dataset based on harmonised ECB bank interest‑rate statistics, match market and bank rates by maturity, and apply new panel‑econometric methods to test for heterogeneity. The study finds substantial heterogeneity in pass‑through across euro‑area countries and discusses possible explanations.

Abstract

The present paper investigates the pass-through between market interest rates and bank interest rates in the euro area. Compared to the large interest rate pass-through literature the paper mainly improves upon two points. First, a novel data set, partially based on new harmonised ECB bank interest rate statistics is used. Moreover, the market rates are selected in a way to match the maturities of bank and market rates using information provided by the new statistics. Secondly, new panel-econometric methods are applied to test for heterogeneity in the pass-through process. The paper shows a large heterogeneity in the pass-through of market rates to bank rates between euro area countries and finally possible explanations of the heterogeneity are discussed.