Has the transmission of policy rates to lending rates been impaired by the Global Financial Crisis?

Central banks of major advanced economies have maintained a very accommodative monetary policy stance in the last few years. However, concerns have surfaced that the transmission of low policy rates to lending rates has been weaker than in the past. Has the transmission of policy rates to lending rates been impaired by the Global Financial Crisis? To answer this question, we first estimate standard cointegrating equations linking policy and lending rates for non-financial firms in Italy, Spain, United Kingdom and United States. We then test for structural change in the cointegration parameters, reporting strong evidence of a break after Lehman Brothers' default. Such structural break is due to a strong increase in the mark-up between the lending rate and the policy rate that standard models assume constant in the long run. The structural shift is explained by compounding the lending rate equation with measures of risk.