# Restoring euro area monetary transmission: Which role for government bond rates?

- 99 Downloads

## Abstract

For a number of euro area periphery countries, this paper explores the stability of the link between bank lending rates and yields on sovereign bonds. A stable relationship between these interest rates is important for the ECB’s attempt to restore monetary policy transmission by conducting unconventional measures that aim at bringing down government bond rates. Using vector autoregressive models with time-varying parameters, we find that bank lending rates adjusted incompletely to changes in government bond rates before the onset of the financial crisis, while their responsiveness has even further weakened thereafter. Thus, our results suggest that periphery bank lending rates have not only decoupled from policy rates after mid-2008, but also from yields on sovereign bonds.

## Keywords

ECB Unconventional monetary policy Euro area crisis Interest rate link Time-varying parameter vector autoregressive models## JEL Classification

E42 E43 E44 E58 E63## References

- Albertazzi U, Ropele T, Sene G, Signoretti FM (2014) The impact of the sovereign debt crisis on the activity of Italian banks. J Bank Finance 46:387–402Google Scholar
- Altavilla C, Canova F, Ciccarelli M (2016a) Mending the broken link: heterogeneous bank lending and monetary policy pass-through. Working Paper Series 1978, European Central BankGoogle Scholar
- Altavilla C, Giannone D, Lenza M (2016b) The financial and macroeconomic effects of the OMT announcements. Int J Cent Bank 12(3):29–57Google Scholar
- Altavilla C, Pagano M, Simonelli S (2016c) Bank exposures and sovereign stress transmission. Working Paper Series 1969, European Central BankGoogle Scholar
- Amir-Ahmadi P, Matthes C, Wang M-C (2016) Choosing prior hyperparameters. Working Paper 16-9, Federal Reserve Bank of RichmondGoogle Scholar
- Angeloni I, Kashyap AK, Mojon B (eds) (2012) Monetary policy transmission in the euro area. Cambridge University Press, CambridgeGoogle Scholar
- Aristei D, Gallo M (2014) Interest rate pass-through in the Euro area during the financial crisis: a multivariate regime-switching approach. J Policy Model 36(2):273–295Google Scholar
- Banerjee A, Bystrov V, Mizen P (2013) How do anticipated changes to short-term market rates influence banks’ retail interest rates? Evidence from the four major euro area economies. J Money Credit Bank 45(7):1375–1414Google Scholar
- Barigozzi M, Conti AM, Luciani M (2014) Do euro area countries respond asymmetrically to the common monetary policy? Oxf Bull Econ Stat 76(5):693–714Google Scholar
- Baumeister C, Benati L (2013) Unconventional monetary policy and the great recession: estimating the macroeconomic effects of a spread compression at the zero lower bound. Int J Cent Bank 9(2):165–212Google Scholar
- Belke A, Beckmann J, Verheyen F (2013) Interest rate pass-through in the EMU—new evidence from nonlinear cointegration techniques for fully harmonized data. J Int Money Finance 37(C):1–24Google Scholar
- Blot C, Labondance F (2013) Business lending rate pass-through in the eurozone: monetary policy transmission during the boom and since the financial crash. Econ Bull 33(2):973–985Google Scholar
- Boivin J, Giannoni MP, Mojon B (2009) How has the euro changed the monetary transmission mechanism? In: NBER macroeconomics annual 2008, volume 23, NBER chapters, pp 77–125. National Bureau of Economic Research, IncGoogle Scholar
- Canova F, Ciccarelli M (2009) Estimating multicountry VAR models. Int Econ Rev 50(3):929–959Google Scholar
- Canova F, Gambetti L (2009) Structural changes in the us economy: Is there a role for monetary policy? J Econ Dyn Control 33(2):477–490Google Scholar
- Chib S (2001) Markov chain monte carlo methods: computation and inference. In: Heckman JJ, Leamer E (eds) Handbook of econometrics, vol 5. Elsevier, Amsterdam, pp 3569–3649Google Scholar
- Cimadomo J, D’Agostino A (2015) Combining time variation and mixed frequencies: an analyse of government spending multipliers in Italy. J Appl Econom 31(7):1276–1290Google Scholar
- D’Agostino A, Ehrmann M (2014) The pricing of G7 sovereign bond spreads—the times, they are a-changin. J Bank Finance 47:155–176Google Scholar
- D’Agostino A, Gambetti L, Giannone D (2013) Macroeconomic forecasting and structural change. J Appl Econom 28(1):82–101Google Scholar
- Darracq Pariès M, Moccero D, Krylova E, Marchini C (2014) The retail bank interest rate pass-through: the case of the euro area during the financial and sovereign debt crisis. Occasional Paper Series 155, European Central BankGoogle Scholar
- De Bondt GJ (2005) Interest rate pass-through: empirical results for the euro area. Ger Econ Rev 6:37–78Google Scholar
- De Santis R (2016) Impact of the asset purchase programme on euro area government bond yields using market news. Working Paper Series 1939, European Central BankGoogle Scholar
- DelNegro M, Primiceri G (2013) Time-varying structural vector autoregressions and monetary policy: a corrigendum. Staff Reports 619, Federal Reserve Bank of New YorkGoogle Scholar
- Demirer M, Diebold F, Liu L, Yilmaz K (2018) Estimating global bank network connectedness. J Appl Econom 33(1):1–15Google Scholar
- Diebold F, Yilmaz K (2014) On the network topology of variance decompositions: measuring the connectedness of financial firms. J Econom 182(1):119–134Google Scholar
- Draghi M (2012) Rationale and principles for financial union. Speech held at the 22nd Frankfurt European Banking CongressGoogle Scholar
- Eser F, Schwaab B (2013) Assessing asset purchases within the ECB’s securities markets programme. Working Paper Series 1587, European Central BankGoogle Scholar
- European Central Bank (2010a) Box 1: additional measures decided by the governing council. Monthly Bulletin, May, pp 7–8Google Scholar
- European Central Bank (2010b) Box 1: euro area money growth and the securities markets programme. Monthly Bulletin, June, pp 24–26Google Scholar
- European Central Bank (2011) Box 5: financial markets in early August 2011 and the ECB’s monetary policy measures. Monthly Bulletin, September, pp 47–53Google Scholar
- European Central Bank (2012) Editorial. Monthly Bulletin, September, pp 5–11Google Scholar
- European Central Bank (2013) Assessing the retail bank interest rate pass-through in the euro area at times of financial fragmentation. Monthly Bulletin, August, pp 75–91Google Scholar
- European Central Bank (2014) The determinants of euro area sovereign bond yield spreads during the crisis. Monthly Bulletin, May, pp 67–83Google Scholar
- European Central Bank (2015a) Box 1: the governing council’s expanded asset purchase programme. Economic Bulletin, Issue 1, pp 15–18Google Scholar
- European Central Bank (2015b) ECB announces expanded asset purchase programme. Press release, January 2015Google Scholar
- European Central Bank (2017) MFI lending rates: pass-through in the time of non-standard monetary policy. Economic Bulletin, Issue 1, pp 40–63Google Scholar
- European Parliamentary Research Service (2015) Monetary policy of the European Central Bank—strategy, conduct and trends. In: Depth Analysis February, European ParliamentGoogle Scholar
- Fratzscher M, Giavazzi F, Portes R, Weder di Mauro B, Wyplosz C (2013) A call for support for the European Central Bank’s OMT programme. https://berlinoeconomicus.diw.de/monetarypolicy/. Accessed 19 May 2016
- Gelfand A, Dey D (1994) Bayesian model choice: asymptotics and exact calculations. J Roy Stat Soc B 56(3):501–514Google Scholar
- Geweke J (1994) Priors for macroeconomic time series and their application. Econom Theory 10(3–4):609–632Google Scholar
- Giannone D, Lenza M, Reichlin L (2012) Money, credit, monetary policy and the business cycle in the euro area. CEPR Discussion Papers 8944, C.E.P.R. Discussion PapersGoogle Scholar
- Giannone D, Lenza M, Primiceri GE (2015) Prior selection for vector autoregressions. Rev Econ Stat 97(2):436–451Google Scholar
- Hristov N, Hülsewig O, Wollmershäuser T (2014) The interest rate pass-through in the euro area during the global financial crisis. J Bank Finance 48(C):104–119Google Scholar
- Kapetanios G, Mumtaz H, Stevens I, Theodoridis K (2012) Assessing the economy-wide effects of quantitative easing. Econ J 122(564):316–347Google Scholar
- Karagiannis S, Panagopoulos Y, Vlamis P (2010) Interest rate pass-through in Europe and the US: monetary policy after the financial crisis. J Policy Model 32(3):323–338Google Scholar
- Kok Sørensen C, Werner T (2006) Bank interest rate pass-through in the euro area: a cross country comparison. Working Paper Series 580, European Central BankGoogle Scholar
- Koop G, Leon-Gonzalez R, Strachan RW (2009) On the evolution of the monetary policy transmission mechanism. J Econ Dyn Control 33(4):997–1017Google Scholar
- Korobilis D (2014) Data-based priors for vector autoregressions with drifting coefficients. Working Papers 2014/04, Business School of Economics, University of GlasgowGoogle Scholar
- Kwapil C, Scharler J (2010) Interest rate pass-through, monetary policy rules and macroeconomic stability. J Int Money Finance 29(2):236–251Google Scholar
- Maudos J, Fernandez de Guevara J (2004) Factors explaining the interest margin in the banking sectors of the European Union. J Bank Finance 28(9):2259–2281Google Scholar
- Mojon B (2000) Financial structure and the interest rate channel of ECB monetary policy. Working Paper Series 40, European Central BankGoogle Scholar
- Nakajima J (2011) Time-varying parameter VAR model with stochastic volatility: an overview of methodology and empirical applications. IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of JapanGoogle Scholar
- Nakajima J, Kasuya M, Watanabe T (2011) Bayesian analysis of time-varying parameter vector autoregressive model for the Japanese economy and monetary policy. J Jpn Int Econ 25(3):225–245Google Scholar
- Neri S (2013) The impact of the sovereign debt crisis on bank lending rates in the euro area. Questioni di Economia e Finanza (Occasional Papers) 170, Bank of Italy, Economic Research and International Relations AreaGoogle Scholar
- Peersman G, Smets F (2003) The monetary transmission mechanism in the euro area: evidence from var analysis. In: Angeloni I, Kashyap A, Mojon B (eds) Monetary policy transmission in the euro area. Cambridge University Press, Cambridge, pp 36–55Google Scholar
- Pesaran H, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29Google Scholar
- Primiceri GE (2005) Time varying structural vector autoregressions and monetary policy. Rev Econ Stud 72(3):821–852Google Scholar
- Sa F, Towbin P, Wieladek T (2011) Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation. Globalization and Monetary Policy Institute Working Paper 79, Federal Reserve Bank of DallasGoogle Scholar
- Sander H, Kleimeier S (2002) Asymmetric adjustment of commercial bank interest rates in the euro area: an empirical investigation into interest rate pass-through. Kredit und Kapital 35(2):161–192Google Scholar
- Sander H, Kleimeier S (2004) Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration. J Int Money Finance 23(3):461–492Google Scholar
- Saunders A, Schumacher L (2000) The determinants of bank interest rate margins: an international study. J Int Money Finance 19(6):813–832Google Scholar
- van Leuvensteijn M, Sørensen CK, Bikker JA, van Rixtel AA (2013) Impact of bank competition on the interest rate pass-through in the euro area. Appl Econ 45(11):1359–1380Google Scholar
- von Borstel J, Eickmeier S, Krippner L (2016) The interest rate pass-through in the euro area during the sovereign debt crisis. J Int Money Finance 68:386–402Google Scholar
- Zoli E (2013) Italian sovereign spreads: their determinants and pass-through to bank funding costs and lending conditions. IMF Working Paper WP/13/84, International Monetary FundGoogle Scholar