BANK INTEREST RATE PASS-THROUGH IN THE EURO AREA: THE IMPACT OF THE FINANCIAL CRISIS

George Michalopoulos
Konstantinos Tsermenidis
University of Macedonia, Greece

ABSTRACT

This study examines the interest rate pass-through process in the Euro area banking
market and the impact of the post-2008 financial turmoil on this process using the recently
produced cost of borrowing indicators (ECB, 2013). The authors use a typical interest rate pass-
through model, augmented with key structural variables capturing demand and supply conditions
in banking markets across counties. After endogenously identifying the timing of the structural
break caused by the financial crisis, the authors estimate the model for both the pre-crisis and the
post-crisis periods, using the methodology of the Pooled Mean Group and the simpler Mean
Group estimators (Pesaran, Shin & Smith, 1999). The results of this study indicate an increased
pass-through heterogeneity within the Eurozone during the post-crisis period. This can be
explained by structural factors which influenced the long-run equilibrium of the pass-through
process, as well as the increased dispersion of the short-run dynamics.
Keywords: Interest rates, euro, banking market, financial crisis