Asymmetric Adjustment of Commercial Bank Interest Rates in the Euro Area : An Empirical Investigation into Interest Rate Pass-Through

This paper investigates the monetary transmission mechanism within the Euro area and is providing new evidence on the financial market side of the monetary mechanism in Europe. In particular, we examine the pass-through of money market rates to commercial bank lending rates by allowing for the existence of and possible changes in a long-run equilibrium relationship between these two rates. Methodologically, this paper is based on the traditional pass-through literature by incorporating an error correction mechanism, which is obtained from cointegration analyses allowing for structural breaks and symmetric as well as for a variety of asymmetric adjustment mechanisms. While we are able to confirm some results of earlier pass-through studies regarding an asymmetric monetary transmission mechanism within the Euro area, our study provides new evidence in two areas: (1) Not only does the speed of adjustment differ across countries but (2) the nature of the adjustment process itself is heterogeneous across countries. Overall, this study provides an in-depth view into the differential workings of the financial markets across Europe