Structural and Cyclical Determinants of Bank Interest Rate Pass-Through in Eurozone

This paper empirically investigates the evolution and the sources of interest rate pass-through heterogeneity in the Eurozone for a sample of 11 euro area countries over the period 2003M1-2011M12. Considering two harmonized bank retail rates, we first estimate single equation error correction models (ECM) and find an important pass-through heterogeneity, both for household and firm rates, even if results suggest that heterogeneity is not a new phenomenon. On the basis of this result, we then extend our analysis by studying the role played by a large number of structural and cyclical factors on monetary policy transmission. Findings based on a panel ECM approach and a panel interaction VAR framework indicate that financial tensions and fragile economic activity following the crisis are not the only factors that explain the heterogeneous monetary transmission in the euro. The differences of financial market structures across countries, in terms of banking competition and financial market development, also explain a part of this heterogeneity. In terms of policy implications, this means that future reforms promoting a more efficient and homogeneous monetary policy transmission should not only focus on risk factors, but also try to consolidate financial integration.