tailieunhanh - Interest rate setting by universal banks and the monetary policy transmission mechanism in the euro area

The international consequences of zero-interest-rate policies are also negative. With interbank markets in the . and Europe congested, forward foreign exchange markets become more difficult to organize. Without forward cover, exporters and importers find it more difficult to secure normal letters of credit. In the financial panic of 2008, foreign trade imploded much more than domestic trade. In addition, the Fed’s zero interest rate strategy inevitably weakens the dollar in the foreign exchanges. Besides complicating the management of recovery in other countries facing inflows of hot money from the United States, it heightens the long-term inflationary threat. | Interest rate setting by universal banks and the transmission mechanism in the euro area Interest rate setting by universal banks and the monetary policy transmission mechanism in the euro area Gabe de Bondt Benoit Mojon and Natacha Valla 6 November 2002 Preliminary Draft Abstract This paper empirically analyses the pass-through of changes in market interest rates to retail bank interest rates in euro area countries. The results confirm earlier findings that retail bank rates adjust sluggishly to market rates. Differences in the degree of this pass-through persisted after the introduction of the euro both across the five segments of the retail bank markets analysed and across the ten euro area countries considered. First the sluggishness is not generally due to an ability of universal banks to fund loans by deposits rather than securities. Second estimation results of linear and state dependent error correction models show that retail bank interest rates adjust to changes in funding lending rates or opportunity costs deposit rates which are approximated by a weighted average of short and long-term market interest rates. Furthermore it is found that the introduction of the euro has speed up the adjustment of retail bank interest rates to market interest rates. One possible factor behind this evolution is in the evolution could be related to competitive forces in the different segments of the retail bank market. Keywords retail bank interest rates market interest rates euro area countries JEL classification E43 G21 European Central Bank Kaiserstrasse 29 D-60311 Frankfurt am Main GERMANY. E-mail addresses bondt@ and . We thank Jesper Berg Francesco Drudi Michael Ehrmann and Oreste Tristani for their reflexions on a previous draft Hans-Joachim Klockers for his comments and Rasmus Pilegaard for excellent data assistance. All views expressed are those of the authors alone and do not necessarily reflect those of the