Interest Rate Pass-Through in the EMU – New Evidence from Nonlinear Cointegration Techniques for Fully Harmonized Data*

This study will put under close scrutiny the monetary transmission process in the eurozone between 2003 and 2011. To this purpose, we investigate the interest rate pass-through from money market rates to various loan rates for up to twelve countries of the European Monetary Union. Applying a variety of cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). From these findings, we allow for different nonlinear patterns in the short-run dynamics of loan rates. Our investigation contributes to the literature mainly in two ways. On the one hand, we use fully harmonized data from the ECB’s MFI interest rate statistics and on the other hand, we consider smooth transition models as an extension of conventional threshold models. Our results point to considerable differences in the size of the pass-through with respect to either different loan rates or countries. In the majority of cases, the pass-through is incomplete and the dynamics of loan adjustment are different for reductions and hikes of money market rates.