Bank Lending Rate Pass-Through and Differences in the Transmission of a Single EMU Monetary Policy.

The pass-through from the money market rate to several bank lending rates and the government bond rate is investigated for 12 European countries over the period 1980-2000, by applying a SVAR based on the Cholesky decomposition. Simulations of a one percent point rise in the money market rate, performed for all countries, reveal divergences within and between countries in the dynamics of the lending rate pass-through. Subsequently, this pass-through is introduced in an enlarged SVAR model to account for the intermediation role of banks in the transission process of monetary policy to the real economy, for 7 European countries. The simulation results indicate a significant role for the banking sector. Moreover some asymmetries in the price of credit both within and across countries in Europe exist. The different effects on the real economy (private consumption and investment) depend on the magnitude of the lending rate pass-through.