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Journal of International Money and Finance

23 (2004) 461492
www.elsevier.com/locate/econbase

Convergence in euro-zone retail banking?


What interest rate pass-through tells us about
monetary policy transmission, competition
and integration
Harald Sander a,b,, Stefanie Kleimeier b,c
a

Faculty of Economics and Business Administration, Claudiusstr.1, University of Applied Sciences


Cologne, 50678 Koln, Germany
METEOR Fellow, Tongersestraat 53, Maastricht University, 6211 LM Maastricht, The Netherlands
c
Limburg Institute of Financial Economics, Tongersestraat 53, Maastricht University,
6211 LM Maastricht, The Netherlands

Abstract
This study aims at unifying the empirical research on interest-rate pass-through in the
euro zone. After endogenously determining structural breaks we select optimal pass-through
models, which allow for thresholds and asymmetric adjustment. By applying these models to
monetary policy shocks as well as cost-of-funds changes, we show that in post-break periods
monetary policy transmission has become faster, that heterogeneity across the euro zone has
decreased in some banking markets, and that more competition improves the pass-through
predominantly in deposit markets. As national characteristics are still important passthrough determinants, convergence remains incomplete and monetary policy will continue to
operate in a heterogeneous euro zone.
# 2004 Elsevier Ltd. All rights reserved.
JEL classication: E43; E52; E58; F36
Keywords: Interest rates; Monetary policy; European Monetary Union; European banking; Competition
in banking; European nancial integration; Banking structure; Asymmetric adjustment; Cointegration
analysis; Threshold cointegration; Structural breaks

Corresponding author. Tel.: +49-221-82753419; fax: +49-221-82753131.


E-mail address: gh.sander@t-online.de (H. Sander).

0261-5606/$ - see front matter # 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jimonn.2004.02.001

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

1. Introduction
How uniform is the monetary transmission process in the euro zone? Given the
dominant role of bank nance in the euro zone, banks are important conveyers of
monetary policy impulses.1 However, banking markets are often considered to be
more resistant to convergence than other parts of the monetary transmission mechanism. As such, divergences in national banking market structures and competition
as well as a lack of euro-zone banking market integration can be expected to lead
to heterogeneous eects of monetary policy across the euro-zone economies.
Recent literature has therefore focused on empirical analyses of the pass-through
of monetary policy impulses to retail banking interest rates in the euro zone.2
Overall, these studies agree that there is a substantial degree of short-run bank
interest rate stickiness. Furthermore, all studies nd considerable dierences in the
pass-through not only across dierent bank lending and deposit rates but also
across countries. These dierences are typically attributed to the divergent structures of national nancial systems. However, the single currency is often perceived
to be a unifying force by making the pass-through faster, more complete and more
homogeneous over the recent years. Nevertheless, the dierences in the results of
pass-through studies remain large and can be attributed mainly to four factors: (1)
the choice of the exogenous market interest rate, (2) the length and timing of the
sample periods, particularly with respect to the treatment of possible structural
breaks, (3) the chosen methodology for the pass-through analysis, and (4) the
design of the analysis of pass-through determinants.
In this study we provide a unifying analysis of the euro-zone pass-through mechanism by addressing these four issues: First, the pass-through is investigated by
using both proxies for monetary policy rates as well as proxies for the banks cost
of funds. The rst approach focuses on the transmission of monetary policy impulses into the nancial sector while the second approach highlights the role of competition and market structures. Both approaches can be found in the literature and
should therefore be viewed as complementary. Our unifying analysis allows for a
direct comparison. Second, we investigate if and when the pass-through has changed between 1993 and 2002 by not postulating, but endogenously searching for
structural breaks. Third, we estimate a large variety of pass-through models,
including threshold and asymmetric adjustment models. The model nally used for
each retail rate in each country is automatically selected according to statistical
criteria set a priori. Finally, we investigate the determinants of the size, speed and
convergence of the pass-through process.
The results of our study can be summarized as follows: First, the euro-zone passthrough mechanisms have undergone considerable structural changes in the past
1
See Bernanke and Gertler (1995) and Kashyap and Stein (1993) for a discussion of the dierent
transmission channels of monetary policy.
2
This literature includes BIS (1994), Cottarelli et al. (1995), Borio and Fritz (1995), Mojon (2000), de
Bondt (2002), de Bondt et al. (2002); Kleimeier and Sander (2002, 2003), Sander and Kleimeier (2002),
and Toolsema, Sturm and de Haan (2002), Heinemann and Schuler (2003).

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

463

decade. However, these structural breaks do not necessarily coincide with the
introduction of the single currency but have often occurred much earlier. This
result contests exogenously setting the break point in January 1999. One would
then eventually attribute the observed changes in the pass-through process to the
introduction of the single currency, while it may in fact reect the impact of earlier
changes in EU banking market regulation, or expectational eects in the run up to
EMU, or the impact of lower money market rate volatility prior to 1999. A second
result is that during the post-break period the pass-through of monetary policy
impulses has improved with respect to lending but not to deposit rates. We also
nd that there is no improvement over time in the pass-through of cost-of-funds
changes. Furthermore, and in contrast to some earlier studies, we nd an incomplete long-run pass-through for most retail rates. Interesting also, the size of the
pass-through is typically higher the shorter maturity of the lending rate. However,
the grip that monetary policy now has on long-term lending rates, such as mortgage rates, has also improved. Whilst the pass-through mechanism has generally
remained heterogeneous across euro-zone countries, the market for short-term corporate lending has become more homogeneous, thus conveying the statistical
picture of a more integrated market. Finally, we nd that the distinct structural
features of national nancial markets as well as macroeconomic factors such as
interest-rate volatility, structural ination and growth can explain a considerable
part of the pass-through heterogeneity. However, legal and cultural dierences
remain statistically signicant determinants. We therefore conclude that neither
structural convergence of nancial systems across countries nor a single monetary
policy regime can be expected to fully homogenize the euro-zone pass-through in
the near future.

2. Data and methodology


2.1. Data selection
We investigate the pass-through process for ten dierent loan and deposit rates
in ten euro-zone countries over the period from January 1993 until October 2002.
These rates are available from the ECB with a monthly frequency.3 We compare
the monetary policy approach with the cost-of-funds approach. For the former we use the overnight money market rate as a proxy for the monetary policy
stance. For the industrial organization inspired cost-of-funds approach we follow
3

The ECB provides data for the following retail interest rate: overdrafts on cash accounts (N1), mortgage loans to households (N2), consumer loans to households (N3), short-term loans to enterprises
(N4), medium and long-term loans to enterprises (N5), and other lending rates (N6), current account
deposits (N7), time deposits (N8), savings accounts (N9), and other deposit rates (N10). Whereas some
national series start as early as 1980, data for a larger number of EMU member countries are available
only since the mid 1990s. Considering potential disturbing eects of the EMS crisis on our results, we
decided to focus on the period after 1992. We include Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Netherlands, Portugal, and Spain in our sample.

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

de Bondt (2002) by selecting the market interest rate with the highest correlation
with the respective retail lending or deposit rate as a proxy for the cost of funds. In
our study, this leads to the choice of the 10-year rate as the cost of funds rate for
mortgages, the 12-months rate for consumer loans, the 1-month rate for short-term
corporate loans, the 6-months rate for medium- and long-term corporate loans, the
1-month rate for current account deposits, and the 3-months rate for time deposits
and savings accounts. For the analysis of the structural determinants of the passthrough process, we collect a large number of banking market descriptors from
recent publications of the ECB (2000, 2002) and the OECD. Moreover, the usual
macro-economic and nancial development control variables are collected.4
2.2. The empirical pass-through model
Our empirical pass-through analysis employs a unifying approach that utilizes
VAR and cointegration methodologies allowing for asymmetric and threshold
adjustment. Traditionally, the pass-through process has simply been modeled as a
VAR process (Cottarelli and Kourelis, 1994):

BRt b0

k
X
i1

bBR;i BRti b1 Mt

n
X

bM;i Mti et ;

i1

where BRt and Mt are lending and market rates, respectively, and k and n indicate the optimal lag lengths.5 However, it is important to recognize that the time
series for interest rates typically exhibit an I(1) property. In this case, the empirical
pass-through model is best estimated using rst dierences:
k
n
X
X
DBRt
bBR;i DBRti b1 DMt
bM;i DMti et :
i1

i1

This specication avoids spurious regression problems but leads to a loss of


information about long-run relationships. Fortunately, this information can be
recovered if BR and M are cointegrated. The VAR then needs to be augmented by
an (lagged) error correction term (ECT):
DBRt

k
n
X
X
bBR;i DBRti b1 DMt
bM;i DMti bECT ECTt1 et :
i1

i1

The main data source is Datastream. More details are given in Sander and Kleimeier (2005) available as LIFE Working Paper WP04-005 at http://www.fdewb.unimaas.nl/nance/workingpapers/.
5
Whenever an optimal lag length has to be determined, the minimum AIC criterion is used allowing
for a maximum of four lags.

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

465

The ECT measures the deviation from the long-run equilibrium, which can be
obtained from the estimated error of the cointegration regression:
BRt h0 hMt ut :

We estimate the appropriate version of the pass-through model as either Eqs. (1)
and (2), or (3) depending on the time series and cointegration properties of the
interest rate series.6 In all specications, the impact multiplier is estimated by the
coecient b1. A value of less than 1 indicates sluggish adjustment, also known as
lending rate stickiness. The long-run relationship between market rates and retail
rates is given by Eq. (4) and can be interpreted either as a cointegration relationship or as the long-run solution of the VAR. The long-term multiplier h can be
directly obtained from estimating Eq. (4) if the rates are cointegrated. Otherwise,
the long-term multiplier has to be calculated from (1) or (2) as:
P
b1 ni1 bM;i
:
h
P
1  ki1 bBR;i

A full pass-through in the long run is reected by h 1. An imperfect passthrough h < 1 could be caused by a less than perfect elasticity of demand for
banking products, the existence of market power, a lack of market contestability,
switching costs, or information asymmetries. If the long-run pass-through is found
to be overshooting h > 1 in lending markets, this can be interpreted as a situation
where banks increase lending rates to compensate for higher risks instead of
rationing credit.7
Given the major developments in the euro zone since 1992, the long-run relationship may be subject to structural changes. However, unlike other pass-through
studies we do not exogenously postulate a break point and then test for its presence. Instead, we determine the presence and timing of the break endogenously by
estimating a supremum F (supF) test for Eq. (4). This test can be interpreted as a
rolling test where standard Chow tests are conducted for a series of dierent break
points, which move through the mid-80% of the sample period.8 On the base of
these tests we constructwhen appropriatepre- and post-break periods for every
national retail interest rate. This allows us to obtain additional information on the
timing of structural changes and to estimate pass-through models for break-free
sample periods.
6
We employ various tests to establish whether or not the interest rate series exhibit unit roots. Given
the likely presence of a structural break, we conduct standard unit root tests for the pre- and post-break
periods. For the full period we additionally estimate unit root tests, which are valid in the presence of a
structural break. Details are available in Sander and Kleimeier (2004).
7
De Bondt (2002) discusses a model where banks price higher default probabilities into lending rates.
His perfect-competition model assumes that banks are able to distinguish between risky and non-risky
borrowers.
8
For details on this test see Andrews (1993), Diebold and Chen (1996), Hansen (1992). SupF equals
the largest Chow F-statistic and is compared to critical values as reported by Hansen (1992).

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

While most pass-through studies focus on symmetric adjustment toward


the long-run equilibrium, we have advocated in a previous study (Sander and
Kleimeier, 2002) that threshold and asymmetric adjustment mechanisms should
both be considered for two main reasons: First, retail rate adjustment patterns in
the euro zone are indeed frequently either asymmetric or occur only beyond a certain threshold. Thus, they should not be ignored. Second, using models with asymmetries allows us to detect cointegration in cases where there are asymmetries and
where other methods would thus fail to detect cointegration and wrongly re-direct
the researcher to the pass-through model of Eq. (2).
We include ve asymmetric specications for the adjustment of interest rates.
Consider rst the symmetric pass-through model. Here the ECT is dened as
ECTt1 ut1

and cointegration testing is based on the DurbinWatson (DW), DickeyFuller


(DF) and augmented DickeyFuller (ADF) tests. As the rst asymmetric model
we consider the threshold autoregressive model (TAR0) developed by Tong
(1983). The model distinguishes whether the explained interest rate is above or
below its equilibrium level. Thus, the TAR0 allows for asymmetric adjustment
depending on the sign of the equilibrium deviation. For example, if the money
market rate decreases without an immediate adjustment of the lending rate, we
obtain a positive realization of the error term ut. When in this case the autoregressive decay is faster than in the case of money market rate increases, the lending rate adjustment is faster downward than upward. For this TAR0 model, the
ECT is dened as
ECTt1 It ut1 1  It ut1

where It represents a Heaviside indicator for dierent states of ut1 such that

1 if ut1  0
It
:
0 if ut1 < 0

Using this denition we estimate Eq. (9):


Dut It q1 ut1 1  It q2 ut1

m
X

q2i Duti et :

i1

Cointegration testing takes the form of a modied ADF test. The null of no cointegration is rejected if the estimated F-statistic for H0: q1 q2 0 is statistically
signicant based on critical values provided by Enders and Siklos (2000). If cointegration is established, an F-test for H0: q1 q2 indicates the presence of asymmetry.
The second asymmetric model (TAR) is a modication of the TAR0 in the
sense that the threshold is now allowed to deviate from zero. The rationale is that
retail rates may adjust dierently to a disequilibrium once a certain minimum devi-

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

467

ation in one direction is exceeded. For the TAR model, the Heaviside indicator in
conjunction with Eq. (7),9 is dened as

1 if ut1  a0
It
:
10
0 if ut1 < a0
Following Chan (1993), the optimal threshold a0 is found by searching over the
mid-80% of the distribution of ut and selecting the model for which the residual
sum of squares is minimized. Cointegration and asymmetry testing proceeds with
the above-described F-tests.
The third variation is a Band-TAR model (B-TAR), which can reect both
interest rate stickiness, driven by menu-cost behavior of banks, as well as interest
rate smoothing. For example, menu-cost behavior could be relevant if we nd cointegration only outside a band bordered by a0 and a0 . For the B-TAR model, the
Heaviside indicator in conjunction with Eq. (7) is now dened as
8
and 0 otherwise
< I1t 1 if ut1  a0
11
Ijt I2t 1 if jut1 j < a0 and 0 otherwise
:
I3t 1 if ut1 a0 and 0 otherwise
while Eq. (9) is modied to
m
X
Dut I1t q1 ut1 I2t q2 ut1 I3t q3 ut1
q3i Duti et :

12

i1

The F-tests for cointegration and asymmetry are now applied to all three coecients qj.
Finally, our fourth and fth asymmetric models represent momentum threshold
autoregressive (M-TAR) models. In the TAR models the autoregressive decay
always depends on the degree of deviation from equilibrium. In contrast, in the
M-TAR approach the adjustment speed depends on how fast the rates move away
from or towards equilibrium. As such, M-TAR adjustment can reect behavior by
banks, which attempt to smooth out large market rate changes. In this case, the
Heaviside indicator depends on the change in the error correction term Dut such
that

1 if Dut1  a0
It
:
13
0 if Dut1 < a0
The ECT is dened accordingly. In a manner similar to the TAR0 and TAR specications, M-TAR models can either be estimated with a threshold a0 0 leading
9
For both, the TAR and the following B-TAR model, the optimal lag length m of the TAR0 specication is used. Correspondingly, the optimal lag length of the M-TAR0 model is used for the M-TAR
model.

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

to the M-TAR0 specication or can be optimized at a0 a0 > 0 leading to the


M-TAR specication.
The objective of the methodology employed in this study is to obtain the optimal
pass-through model rather than arbitrarily selecting one. As such, we identify
break-free sub-periods. We then proceed with unit root testing. If the rates are I(0),
we estimate the pass-through model as in Eq. (1). If the rates are I(1), we rst estimate all ve asymmetric TAR-type models, select the best asymmetric model based
on the AIC criterion, and test this best model for asymmetric cointegration. If
asymmetric cointegration is conrmed, we estimate the pass-through model as in
Eq. (3) with the appropriate asymmetric ECT. If asymmetric cointegration is rejected, we test for symmetric cointegration andif conrmedinclude a symmetric
ECT in the pass-through model of Eq. (3). If symmetric cointegration is also rejected, the pass-through model is estimated according to Eq. (2) without any ECT.
Finally, based on the selected pass-through model multipliers are obtained for a
variety of positive and negative interest rate shocks.

3. Pass-through and monetary transmission


3.1. Structural changes in euro-zone banking
The euro-zone banking system has undergone dramatic structural changes in the
past decade driven by not only the introduction of the single currency but also the
1992/93 ERM crisis and EU regulatory changes, including the 2nd Banking Directive. Our analysis indicates that the endogenously determined structural breaks in
the long-run relationship between market and retail rates already occur before
January 1999. The results reported in Table 1 reveal that the average breakpoint is
October 1996 for the monetary policy approach and December 1996 for the costof-funds approach. Note that dierent banking market segments in dierent countries show dierent breakpoints. In particular, for Spain, Portugal, and Italy breakpoints are as early as 1995 and 1996, possibly showing the impact of the run-up to
EMU with reduced money market rate volatility and ination convergence.
Another early starter is Ireland where some breakpoints are already found in
December 1993.
3.2. Size and speed of the euro-zone pass-through
The optimal pass-through model is estimated for all break-free periods for the
monetary policy and cost-of-funds approach, respectively. Table 2 illustrates our
results by reporting the unweighted averages of the obtained multipliers10. In the
long run, with the possible exception of short-term corporate loans, the size of the
pass-through process is still far from complete. For the monetary policy approach
10

The details of this analysis including all individual country and rate multipliers can be found in
Sander and Kleimeier (2004).

Bankrate

N2mortgage loans to households


N3consumer loans to households
N4short-term loans to enterprises
N7current account deposits
N8time deposits
Belgium N2mortgage loans to households
N3consumer loans to households
N4.1short-term loans to enterprises
N4.2short-term loans to enterprises
N5medium and long-term loans to enterprises
N8time deposits
N9savings accounts
Finland N2mortgage loans to households
N3consumer loans to households
N5medium and long-term loans to enterprises
N7current account deposits
N8time deposits
France
N4short-term loans to enterprises
N5medium and long-term loans to enterprises
N8time deposits
N9savings accounts
Germany N2mortgage loans to households
N3consumer loans to households
N4short-term loans to enterprises
N5medium and long-term loans to enterprises
N8.1time deposits
N8.2time deposits
N9.1savings accounts
N9.2savings accounts
Ireland
N1overdrafts on cash accounts

Austria

Country

Table 1
Structural breaks in the long-run relationship

196.25
253.10
196.26
221.39
199.14
89.26
319.18
48.19
21.25
65.56
23.91
226.14
105.93
101.80
56.00
49.11
170.27
132.42
222.29
11.38
112.11
56.62
442.05
71.72
11.22
40.30
22.35
935.80
36.67
128.80

supF

July-97
September-98
August-97
November-99
March-97
August-95
December-95
April-95
January-94
October-95
December-93
December-95
September-96
September-96
January-96
February-97
August-97
June-97
March-97
January-00
May-98
October-96
February-97
July-00
January-00
September-99
September-99
September-99
October-95
December-98

Breakpoint

Monetary policy approach

14.41
188.86
236.56
200.23
220.36
60.78
182.81
54.69
24.45
38.12
26.79
221.73
99.64
86.25
47.41
46.62
193.92
150.03
169.78
8.24
insignicant
104.56
36.16
480.06
81.82
9.99
insignicant
22.97
9.06
732.66
33.47
145.26

supFa

February-99
August-97
August-97
November-99
March-97
May-98
December-95
March-95
December-93
August-96
December-93
December-95
March-94
September-97
April-98
February-98
November-99
June-97
April-97
January-00
insignicant
May-98
June-95
March-97
February-03
January-00
insignicant
September-99
January-00
insignicant
September-99
November-95
December-98
(continued on next page)

Breakpoint

Cost-of-funds approach

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


469

N2mortgage loans to households


N4short-term loans to enterprises
N5medium and long-term loans to enterprises
N6other lending rates
N9.1savings accounts
N9.2savings accounts
N2mortgage loans to households
N4.1short-term loans to enterprises
N4.2short-term loans to enterprises
N5medium and long-term loans to enterprises
N7current account deposits
N8time deposits

Ireland

30.02
466.47
64.49
65.67
98.82
178.60
100.14
173.12
43.22
47.58
69.89
111.60
9.52
59.41
48.46
80.42

61.51
33.00
40.68
45.07
149.76
129.03
69.42
31.26
39.91
48.08
70.21
110.97
61.82

supF

September-96
August-97
December-98
November-95
December-95
September-97
April-95
July-94
February-95
January-96
February-96
September-96
November-96
September-96
March-96
February-95
March-96

August-99
November-95
December-93
January-00
December-93
December-93
December-97
February-95
February-95
November-97
February-95
September-97

Breakpoint

Monetary policy approach

66.16
466.47
51.29
56.09
58.86
73.79
235.71
74.02
13.83
32.09
69.89
103.25
12.18
60.49
99.52
113.56

49.53
35.15
70.41
4.66
152.03
205.33
131.97
30.09
21.20
43.01
44.16
102.79
41.20

supFa

June-95
August-98
December-98
November-95
December-95
December-95
April-98
October-99
November-99
November-00
July-96
September-96
March-94
November-96
September-94
January-95
December-93

March-94
December-93
December-93
January-00
December-93
December-93
May-98
July-99
June-94
December-96
February-95
January-97

Breakpoint

Cost-of-funds approach

insignicant

a
The supF test is based on the estimated coecient for Eq. (4) using monthly data for the full sample period of January 1993 to October 2002. Statistical
signicance of the breakpoint is established based on critical values reported by Hansen (1992).

N2mortgage loans to households


N4short-term loans to enterprises
N7current account deposits
N8.1time deposits
N8.2time deposits
Portugal N2mortgage loans to households
N3consumer loans to households
N4.1short-term loans to enterprises
N4.2short-term loans to enterprises
N8.1time deposits
N8.2time deposits
Spain
N2mortgage loans to households
N3consumer loans to households
N4short-term loans to enterprises
N5medium and long-term loans to enterprises
N7current account deposits
N8time deposits

Netherlands

Italy

Bankrate

Table 1 (continued )

Country

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

Period

Statistica

Panel A: The Monetary Policy Approach


All
pre
average
std dev
post
average
std dev
All lending
pre
average
std dev
post
average
std dev
All deposit
pre
average
std dev
post
average
std dev
N2mortgage loans
pre
average
to households
std dev
post
average
std dev
N3consumer loans
pre
average
to households
std dev
post
average
std dev
N4short-term loans
pre
average
to enterprises
std dev
post
average
std dev
N5medium and long- pre
average
term loans to enterprises
std dev

Retail rates

0.20
0.17
0.20
0.17
0.20
0.15
0.22
0.15
0.20
0.20
0.17
0.20
0.14
0.12
0.21
0.18
0.16
0.13
0.17
0.12
0.24
0.16
0.24
0.15
0.22
0.19

0.31
0.23
0.37
0.28
0.33
0.23
0.43
0.26
0.28
0.24
0.27
0.27
0.22
0.19
0.45
0.28
0.27
0.24
0.37
0.33
0.43
0.22
0.46
0.22
0.32
0.25

impact 1
mth
0.42
0.29
0.48
0.31
0.46
0.31
0.56
0.30
0.38
0.25
0.35
0.30
0.32
0.26
0.55
0.29
0.36
0.30
0.49
0.43
0.58
0.31
0.67
0.23
0.44
0.36

3
mths
0.49
0.31
0.53
0.33
0.54
0.33
0.62
0.31
0.43
0.26
0.38
0.31
0.43
0.32
0.57
0.29
0.42
0.34
0.55
0.51
0.68
0.31
0.77
0.21
0.49
0.36

6
mths

Multipliers for a +1% shock

Table 2
The average pass-through process and its asymmetries

0.53
0.31
0.54
0.36
0.58
0.34
0.65
0.34
0.46
0.27
0.38
0.32
0.52
0.39
0.57
0.29
0.46
0.35
0.56
0.54
0.71
0.30
0.84
0.27
0.50
0.36

12
mths
0.56
0.32
0.57
0.38
0.62
0.35
0.68
0.37
0.47
0.26
0.40
0.34
0.54
0.34
0.62
0.32
0.63
0.51
0.60
0.53
0.74
0.29
0.87
0.36
0.51
0.36

longrun
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1
mth
0.98
0.10
1.01
0.13
0.98
0.10
1.02
0.16
0.97
0.10
0.98
0.06
1.02
0.05
0.97
0.10
0.98
0.05
1.03
0.05
0.98
0.08
1.08
0.24
0.94
0.19

3
mths
0.98
0.08
0.99
0.11
0.99
0.07
1.00
0.13
0.97
0.09
0.97
0.08
1.01
0.04
0.95
0.10
0.98
0.05
1.01
0.02
0.99
0.02
1.05
0.19
0.96
0.15

6
mths

+1% versus 1% shock

0.98
0.06
0.99
0.08
0.99
0.03
1.00
0.07
0.97
0.09
0.97
0.09
1.00
0.01
0.96
0.08
0.98
0.05
1.00
0.00
1.00
0.00
1.03
0.09
0.97
0.05

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

6
mths

12
mths

1.00
1.00
0.99
0.08
0.07
0.06
1.00
0.99
0.99
0.07
0.07
0.06
1.00
1.01
1.00
0.06
0.03
0.01
1.00
1.00
1.00
0.06
0.05
0.01
1.00
0.99
0.99
0.09
0.10
0.09
0.99
0.99
0.99
0.08
0.09
0.09
1.02
1.01
1.00
0.05
0.04
0.01
0.99
0.98
1.00
0.03
0.04
0.01
1.00
1.00
1.00
0.00
0.00
0.00
1.01
1.01
1.00
0.03
0.02
0.00
0.98
1.00
1.00
0.09
0.02
0.00
0.99
1.00
1.00
0.06
0.07
0.02
1.01
1.01
0.99
0.03
0.05
0.05
(continued on next page)

3
mths

+1% versus +0.25% shock


12
1
mths mth

Asymmetries in multipliersb

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


471

Table 2 (continued )

0.33
0.29
0.33
0.31
0.31
0.19
0.33
0.22
0.35
0.39
0.34
0.40

0.43
0.25
0.42
0.27
0.46
0.25
0.45
0.22
0.39
0.26
0.39
0.33

0.38
0.28
0.10
0.13
0.09
0.14
0.39
0.25
0.40
0.28
0.20
0.16
0.18
0.24

impact 1
mth

0.55
0.31
0.53
0.30
0.60
0.31
0.60
0.25
0.49
0.31
0.44
0.34

0.42
0.24
0.15
0.18
0.16
0.22
0.52
0.21
0.50
0.27
0.27
0.22
0.22
0.28

3
mths

0.61
0.32
0.58
0.30
0.69
0.31
0.66
0.26
0.50
0.30
0.46
0.33

0.46
0.22
0.19
0.21
0.21
0.29
0.60
0.16
0.53
0.27
0.30
0.25
0.21
0.28

6
mths

Multipliers for a +1% shock

Panel B: The Cost of Funds Approach


All
pre
average
std dev
post
average
std dev
All lending
pre
average
std dev
post
average
std dev
All deposit
pre
average
std dev
post
average
std dev

Statistica

0.24
0.14
0.06
0.08
0.04
0.08
0.28
0.23
0.26
0.22
0.14
0.10
0.11
0.13

Period

Panel A: The Monetary Policy Approach


post
average
std dev
N7current account
pre
average
deposits
std dev
post
average
std dev
N8time deposits
pre
average
std dev
post
average
std dev
N9savings accounts
pre
average
std dev
post
average
std dev

Retail rates

0.63
0.32
0.60
0.34
0.72
0.31
0.71
0.31
0.51
0.29
0.45
0.32

0.49
0.22
0.21
0.22
0.23
0.32
0.64
0.15
0.53
0.28
0.31
0.25
0.21
0.27

12
mths

0.65
0.34
0.60
0.34
0.73
0.33
0.69
0.31
0.54
0.31
0.47
0.35

0.50
0.23
0.23
0.22
0.22
0.32
0.64
0.16
0.57
0.31
0.33
0.23
0.20
0.25

longrun

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1
mth

1.00
0.07
1.03
0.12
1.00
0.09
1.05
0.13
1.00
0.04
1.00
0.08

0.96
0.06
0.91
0.21
1.00
0.00
0.99
0.05
0.96
0.08
1.00
0.00
1.01
0.03

3
mths

0.98
0.26
1.03
0.17
1.02
0.19
1.06
0.21
0.93
0.33
0.99
0.07

0.97
0.03
0.92
0.14
1.00
0.00
0.97
0.09
0.94
0.10
1.00
0.00
1.01
0.03

6
mths

+1% versus 1% shock

1.00
0.20
1.03
0.20
1.03
0.24
1.06
0.26
0.95
0.13
0.98
0.06

0.99
0.02
0.96
0.07
1.00
0.00
0.96
0.12
0.94
0.12
1.00
0.00
1.01
0.02

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1.01
0.06
1.04
0.17
1.00
0.03
1.04
0.21
1.02
0.08
1.03
0.10

0.97
0.06
1.05
0.11
1.00
0.00
0.97
0.10
0.98
0.11
1.00
0.00
1.01
0.03

3
mths

1.01
0.04
1.05
0.30
1.01
0.03
1.08
0.39
1.01
0.05
1.01
0.07

0.98
0.03
1.03
0.07
1.00
0.00
0.96
0.12
0.97
0.13
1.00
0.00
1.01
0.03

6
mths

1.01
0.05
1.06
0.37
1.01
0.05
1.10
0.47
1.00
0.04
1.00
0.05

1.00
0.01
1.02
0.05
1.00
0.00
0.96
0.12
0.97
0.13
1.00
0.00
1.01
0.02

12
mths

+1% versus +0.25% shock


12
1
mths mth

Asymmetries in multipliersb

472
H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

post

pre

post

pre

post

pre

post

pre

post

pre

post

pre

post

pre

average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev
average
std dev

0.24
0.21
0.22
0.20
0.32
0.21
0.20
0.09
0.33
0.17
0.42
0.26
0.39
0.22
0.44
0.19
0.10
0.09
0.10
0.10
0.51
0.44
0.50
0.47
0.17
0.16
0.12
0.13

0.37
0.31
0.31
0.23
0.47
0.26
0.32
0.15
0.52
0.23
0.55
0.21
0.45
0.18
0.53
0.21
0.17
0.18
0.18
0.16
0.50
0.20
0.54
0.32
0.25
0.21
0.15
0.17

0.54
0.41
0.43
0.23
0.43
0.26
0.46
0.22
0.71
0.28
0.73
0.21
0.62
0.20
0.71
0.20
0.22
0.24
0.23
0.20
0.67
0.27
0.64
0.31
0.32
0.21
0.17
0.19

0.59
0.37
0.55
0.29
0.58
0.31
0.54
0.30
0.81
0.29
0.75
0.21
0.71
0.23
0.75
0.22
0.25
0.25
0.27
0.25
0.67
0.22
0.65
0.27
0.33
0.28
0.17
0.20

0.66
0.39
0.67
0.44
0.61
0.36
0.56
0.34
0.85
0.28
0.77
0.24
0.69
0.20
0.77
0.24
0.25
0.25
0.28
0.28
0.68
0.20
0.64
0.25
0.35
0.29
0.17
0.20

0.60
0.37
0.65
0.44
0.63
0.37
0.56
0.35
0.91
0.28
0.72
0.20
0.67
0.24
0.76
0.28
0.25
0.24
0.28
0.28
0.70
0.21
0.66
0.27
0.37
0.26
0.17
0.20

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

1.04
0.15
1.06
0.15
1.00
0.00
0.99
0.02
0.98
0.05
0.11
0.17
1.00
0.00
1.06
0.10
1.00
0.00
0.97
0.07
1.01
0.05
1.01
0.11
0.99
0.05
1.01
0.02

1.10
0.35
1.12
0.34
1.00
0.00
1.00
0.00
0.97
0.07
1.08
0.20
1.00
0.00
1.01
0.03
1.00
0.00
0.98
0.07
1.00
0.04
1.00
0.09
0.73
0.66
1.00
0.01

1.13
0.45
1.15
0.44
1.00
0.00
1.00
0.00
0.97
0.06
1.07
0.21
1.00
0.00
0.99
0.03
1.00
0.00
0.99
0.02
0.98
0.05
0.97
0.05
0.90
0.25
1.00
0.01

1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00

0.98
0.06
1.00
0.08
1.00
0.00
1.00
0.00
1.01
0.01
1.11
0.34
1.00
0.00
1.02
0.05
1.00
0.00
1.01
0.03
1.04
0.11
1.05
0.15
1.00
0.01
1.00
0.01

1.02
0.05
1.03
0.06
1.00
0.00
1.00
0.00
1.00
0.01
1.20
0.65
1.00
0.00
1.02
0.06
1.00
0.00
1.00
0.02
1.01
0.06
1.03
0.10
1.00
0.00
1.00
0.00

1.03
0.09
1.04
0.09
1.00
0.00
1.00
0.00
1.01
0.01
1.24
0.80
1.00
0.00
1.01
0.03
1.00
0.00
1.00
0.10
1.01
0.06
1.00
0.07
1.00
0.00
1.00
0.00

a
The reported statistics are the unweighted average (average) and the standard deviation (std dev) of the estimated multipliers based on the optimal passthrough model.
b
Asymmetries in multipliers are dened as the multiplier for a +1% change divided by the multiplier for the 1% or +0.25% change, respectively.

N9savings accounts

N8time deposits

N7current account
deposits

N5medium and longterm loans to enterprises

N4short-term loans to
enterprises

N3consumer loans to
households

N2mortgage loans to
households

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


473

474

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

we nd long-run multipliers for loans on average around 0.6 to 0.7. For deposits,
the average even lies below 0.5. For the cost-of-funds approach the obtained longrun multipliers are somewhat higher but also fall short of a full pass-through.11
Viewed from an industrial organization perspective, the latter result indicates that
euro-zone banking markets may exhibit some form of imperfect competition, such
as market power, lack of contestability, switching costs, or informational asymmetries. Turning to the short run, our impact and intermediate multipliers indicate the
presence of severe price rigidities for both approaches. Nevertheless, the results
also show remarkable increases in the intermediate multipliers for the post-break
period. This reects faster price adjustments for some banking products, particularly mortgages, consumer loans, and short-term loans to enterprises. Regarding
mortgages, it is striking that the eciency of the pass-through process has
increased with respect to monetary policy impulses while the role of cost of funds
has diminished in the short-run adjustment. Possibly the increasing use of exible
rate mortgages is reected in these results. Consequently, and as argued by Sellon
(2002) in the context of the US, monetary policy targeted at short-term market
rates has increased its impact on the cost of mortgages. In consumer lending,
though some improvements have been taking place, the pass-through remains
among the least perfect. For corporate loans the picture is mixed. Regarding shortterm corporate loans, the already fast and almost complete monetary policy passthrough has improved over time while the cost-of-funds 6-months, 12-months, and
long-run multipliers have decreased. The opposite picture emerges for longer-term
corporate loans. Given the nature of these loans a market rate with a matched
maturity might be a better explanatory variable.12
In summary, the multipliers seem to indicate that the size and speed of the passthrough have improved in the post-break period. However, this observation is only
valid for the lending rates reaction to monetary policy innovations. For the costof-funds approach the results are less clear-cut. To prove these points statistically
we regress the size and speed of the pass-through on post-break, country, and rate
dummies.13 Size is dened as the value of the long-run multiplier (h). Speed is
dened as the impact and intermediate multipliers relative to the long-run multiplier. The results are shown in Table 3. They conrm that the size of the passthrough has not improved signicantly in the post-break period. However, a statistically signicant increase in the speed of the pass-through process in the period
from 1 to 6 months is clearly identiable for the monetary policy approach but not
11
This result does not depend on the choice of the market rate proxy and is thus standing in contrast
to the studies by de Bondt (2002) and de Bondt et al. (2002). Given the partly dierent approaches and
timing of the structural breaks, reconciling these dierences remains an important task for future
research.
12
It could be argued that monetary policy targeted at short-term interest rates has only an improved
inuence on the short-term rather than long-term lending rates to enterprises. If, for example, the central bank wants to inuence the cost of investment borrowing of small and medium size enterprises it
appears that she should particularly consider her policys impact on longer-term market rates.
13
We are grateful to Robert DeYoung for suggesting this regression framework.

N4-short-term-oans-to-enterprises

N3-consumer-loans-to-households

Spain

Portugal

Netherlands

Italy

Ireland

Germany

Finland

Belgium

Austria

Pre-break-multiplier

Panel A: The Monetary Policy Approach


Constant

Independent variableb

0.054
0.372
0.222
1.724
0.051
0.361
0.026
0.207
0.144
1.045
0.218
1.619
0.072
0.505
0.289
2.116
0.134
0.983
0.018
0.150
0.250
2.622

0.206
1.664
0.019
0.178
0.235
1.941
0.055
0.521
0.167
1.426
0.117
1.024
0.093
0.771
0.353
3.054
0.297
2.574
0.069
0.694
0.126
1.563

0.464
4.164

long-run
0.561
4.269

Speed
impact

Size

Dependent variablea

Table 3
Country and market determinants of the interest-rate pass-through

0.182
1.301
0.200
1.620
0.470
3.433
0.150
1.245
0.091
0.688
0.173
1.341
0.013
0.098
0.370
2.825
0.403
3.095
0.010
0.090
0.051
0.554

0.753
5.974

1mth

0.194
1.483
0.005
0.046
0.247
1.933
0.280
2.496
0.246
1.993
0.111
0.919
0.222
1.744
0.155
1.266
0.089
0.732
0.019
0.179
0.016
0.187

0.696
5.906

3mth

0.188
1.911
0.071
0.824
0.151
1.569
0.243
2.882
0.212
2.280
0.159
1.755
0.222
2.329
0.054
0.590
0.082
0.894
0.030
0.378
0.026
0.407

0.752
8.504

6mth

0.156
1.765
0.100
1.285
0.085
0.986
0.163
2.156
0.146
1.753
0.105
1.292
0.114
1.330
0.033
0.397
0.184
2.242
0.090
1.267
0.036
0.632

0.840
10.603

12 mths

b long-run

3.454
1.426
4.226
1.877
0.057
0.672
0.309
0.258
0.171
1.993
1.056
0.906
0.069
1.446
0.385
0.602
0.075
0.500
0.479
0.240
0.057
0.569
0.327
0.246
0.220
1.013
1.303
0.421
0.005
1.019
0.027
0.433
0.197
1.336
1.152
0.573
0.088
0.448
0.515
0.197
0.114
3.974
0.769
1.988
0.249
0.287
2.086
0.165
(continued on next page)

0.357
2.162

r long-run

Convergence

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


475

Table 3 (continued )

Ireland

Germany

Finland

Belgium

Austria

Pre-break-multiplier

Panel B: The Cost of Funds Approach


Constant

Adjusted R2
Number of observations

Post-break dummy

N6/N10-other lending or deposit ratesc

N9-savings accounts

N8-time deposits

N5-medium-and long-term loans to


enterprises
N7-current account deposits

Independent variableb

0.034
0.254
0.024
0.196
0.097
0.735
0.066
0.547
0.199
1.597

0.642
5.349

0.400
2.735
0.139
1.035
0.396
2.727
0.159
1.195
0.067
0.493

0.735
5.571

0.065
0.772
0.053
0.525
0.072
0.916
0.073
0.736
0.272
1.381
0.071
1.563
24.3%
114

impact

long-run
0.021
0.213
0.392
3.318
0.006
0.062
0.201
1.725
0.364
1.567
0.001
0.017
34.3%
114

Speed

Size

Dependent variablea

0.051
0.424
0.094
0.854
0.095
0.801
0.201
1.845
0.277
2.467

0.567
5.248

0.016
0.172
0.021
0.182
0.016
0.185
0.207
1.856
0.115
0.515
0.164
3.188
29.9%
114

1mth

0.046
0.388
0.086
0.790
0.136
1.156
0.108
1.002
0.285
2.577

0.786
7.371

0.014
0.161
0.009
0.082
0.031
0.374
0.079
0.755
0.034
0.162
0.157
3.269
27.7%
114

3mth

0.214
2.432
0.215
2.657
0.120
1.377
0.213
2.660
0.334
4.053

0.749
9.439

0.033
0.503
0.010
0.120
0.050
0.812
0.039
0.502
0.019
0.124
0.092
2.540
24.2%
114

6mth

0.170
2.526
0.156
2.531
0.158
2.362
0.140
2.283
0.203
3.215

0.891
14.668

0.015
0.245
0.029
0.410
0.028
0.511
0.032
0.449
0.001
0.011
0.036
1.108
8.8%
114

12 mths

0.092
0.592
0.014
0.101
0.093
0.601
0.110
0.781
0.026
0.182

0.380
2.718

0.026
0.213
0.593
4.001
0.151
1.302
0.264
1.806
0.358
1.227
0.116
1.721
26.7%
114

r long-run

Convergence

5.425
2.619
5.954
3.363
0.753
0.353
0.395
0.198
1.478
0.687
1.396
0.709
2.154
1.073

10.7%
56

1.302
0.781
2.740
1.210
0.795
0.504
2.423
1.234
0.306
0.078

b long-run

476
H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

37.5%
115

0.131
1.044
0.048
0.365
0.145
1.146
0.282
2.235
0.111
1.113
0.154
1.864
0.049
0.469
0.439
4.088
0.002
0.025
0.299
2.876
0.640
3.050
0.052
1.039
8.6%
115

0.339
2.462
0.335
2.302
0.328
2.354
0.389
2.807
0.069
0.622
0.002
0.017
0.065
0.571
0.060
0.510
0.185
2.021
0.108
0.948
0.159
0.691
0.030
0.556
7.4%
115

0.000
0.003
0.054
0.450
0.110
0.9640
0.055
0.484
0.116
1.281
0.053
0.709
0.102
1.094
0.186
1.914
0.113
1.512
0.054
0.577
0.008
0.041
0.049
1.103
10.2%
115

0.001
0.013
0.053
0.450
0.031
0.279
0.067
0.601
0.008
0.089
0.050
0.6850
0.160
1.732
0.131
1.367
0.120
1.619
0.065
0.706
0.463
2.482
0.069
1.552
10.8%
115

0.182
2.199
0.174
1.9860
0.158
1.881
0.138
1.657
0.024
0.364
0.011
0.203
0.131
1.914
0.053
0.748
0.032
0.589
0.093
1.357
0.360
2.590
0.052
1.586
15.6%
115

0.128
2.014
0.133
1.986
0.121
1.881
0.147
2.304
0.062
1.228
0.047
1.1210
0.013
0.255
0.041
0.751
0.060
1.420
0.123
2.339
0.455
4.277
0.039
1.561
23.0%
115

0.077
0.530
0.058
0.374
0.091
0.618
0.025
0.173
0.087
0.745
0.208
2.166
0.112
0.923
0.408
3.260
0.153
1.578
0.271
2.237
0.427
1.746
0.042
0.723
18.9%
57

1.361
0.665
0.261
0.124
5.531
2.699
1.469
0.706
3.498
2.187
1.063
0.751
2.141
1.247
5.063
2.687
2.688
2.023
2.456
1.465
3.024
0.843

The dependent variables of these OLS regressions are the multipliers for a +1% shock in the monetary policy or cost of funds rate.
For each independent variable the estimated coecient is reported in the top row and the tstatistic is reported in italics in the bottom row.
c
The other rates refer to N10 other deposit rates for the monetary policy approach and N6 other lending rates for the cost of funds approach. In each
case, these rates account for only 2 observations in the sample.

Adjusted-R2
Number of observations

postbreak dummy

N6/N10 other lending or depositratesc

N9-savings accounts

N8-time deposits

N5-medium and long term loans


toenterprises
N7-current account deposits

N4-short term loans to enterprises

N3-consumer loans to households

Spain

Portugal

Netherlands

Italy

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


477

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H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

for the cost-of-funds approach. Broadly speaking, monetary policy actions that
target overnight money market rates have increased in relevance as compared to
the role of cost of funds.
With respect to country specics, the monetary policy approach indicates a
somewhat larger pass-through size in Portugal and possibly Italy but a smaller one
for Belgium. Speed is signicantly lower for Portugal, Finland, and Spain for the 1month horizon but higher for Germany, Ireland, and the Netherlands within the 3to 6-months horizon. For the cost-of-funds approach we nd a signicant larger
pass-through size only for Spain, while in the speed regressions the dummies for
the various countries reveal a very heterogeneous picture. One conclusion that
might emerge from this comparative analysis is that the country-specic responses
are more uniform to monetary policy rate changes than to measures of cost of
funds.14
With respect to specic markets, the monetary policy approach indicates a
signicantly larger pass-through size for short-term corporate loans and a smaller
size for current account and saving deposits. These results are in line with the
Monti-Klein model of the monopolistic or oligopolistic banking rm, which
predicts that smaller elasticities imply higher intermediation margins.15 Since
the case can be made that interest changes may have a larger impact on the
short-run funding choice of borrowers than on the wealth of depositors, the latters
supply of deposits may be comparatively less elastic, hence leading to a smaller
and/or slower pass-through for deposits. Regarding speed we do not identify
signicant market-specic changes but this result might be a consequence of
the denition of the speed variable in the presence of size changes in the same
direction.
3.3. Asymmetries in the euro-zone pass-through
For the majority of the national retail interest rates, the pass-through mechanisms are most accurately described by asymmetric models. We select them in 51%
of all cases for the cost-of-funds approach and in 46% of all cases for the monetary
policy approach. From the pre- to the post-break period, the share of cases where
the asymmetric model is selected increases from 42% to 60% and from 29% to 62%,
respectively. This strengthens our case to utilize all proposed asymmetric models
for empirically determining the optimal pass-through model. Furthermore, this
result also implies that the majority of interim multipliers are now dependent on
the direction and size of the market interest rate shock.16
14

This may, however, also indicate intrinsic problems with the cost-of-funds approach, which applies
eventually not appropriatelya uniform cost-of-funds variable for each type of retail rate for all countries.
15
For a discussion of various versions of the Monti-Klein model see e.g. Freixas and Rochet (1997).
16
Note that the multiplier asymmetries reported in Table 2 are qualitatively dierent from the notion
of asymmetry in the TAR modelling. However, given that most of our interim multipliers are smaller
than unity, we can associate a positive interest rate shock with a negative ECT and thus a below-equilibrium state. Consequently, the two types of asymmetry are somewhat comparable.

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

479

In Table 2, asymmetries regarding the direction of the shocks are illustrated by


dividing the multipliers for the positive 1% shock by the multiplier for the negative
1% shock. Deviations from unity indicate asymmetries. For example, a ratio of 1.1
implies that a positive shock has a 10% higher impact than a negative shock.17 In
imperfectly competitive banking markets one would expect a faster upward adjustment for loans rates because the degree of asymmetry is negatively correlated with
the elasticity of the respective loan demand. For deposits, one would expect faster
downward adjustment again depending on the respective elasticities. This theoretical reasoning is largely conrmed by the average ratios for lending and deposit
rates. This result is strongest for loans in the cost-of-funds approach where mortgages and short-term corporate loans exhibit the highest degree of asymmetry.
Long-term corporate loans, for which a higher demand elasticity can be reasoned,
exhibit a more symmetric behavior. Similar observations, though to a lesser degree,
can be made for the monetary policy approach. On average, mortgages react
almost symmetrically to monetary policy rate shocks. However, our individual
country multipliers reveal a large number of cases where a relatively faster downward adjustment takes place.18 Regarding deposits, on average asymmetries show
the expected pattern in both approaches but diminish over timepossibly due to
recent developments in nancial markets. Nevertheless, faster downward adjustments of time deposit rates are still present.
Another type of asymmetry is reected in the impact of large versus small shocks
on retail interest rates. The last four columns in each Panel of Table 2 give
the relative multiplier for a large +1% versus a small +0.25% interest rate shock.
A ratio larger than unity implies that the retail rate reacts more strongly to
large shocks. While the overall picture in the monetary policy approach is
one of symmetry, this is not true for the cost-of-funds approach. In line with
the menu cost argument, mortgages, short-term corporate loans, andto a
lesser extenttime deposits react faster to large than to small shocks in the cost of
funds.

4. Pass-through and retail banking market integration


Pass-through studies are increasingly regarded important for assessing the degree
of nancial integration in the euro-zone retail banking market. Although retail
interest rates have been somewhat converging, this is not necessarily an indication
of an integrated market. In Kleimeier and Sander (2002, 2003) we have shown that
euro-zone retail banking markets are still not integrated when cointegration is considered as an integration indicator and have arrived at a No, No, and Maybe
proposition with respect to the integration of mortgage, consumer lending, and
17

It should, however, be recalled that these data are averages and could easily be misinterpreted. If
some countries are faster in upward adjustments and others in downward adjustments, the average
would still be 1. In such cases, however, a high standard deviation can reveal the underlying asymmetry.
18
Individual country multipliers can be obtained from Sander and Kleimeier (2004).

480

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

short-term corporate lending markets.19 However, with a single monetary policy


and well-integrated wholesale nancial markets, a fast and homogeneous passthrough would create a uniform behavior of euro-zone retail interest rates.
Our regression results reported in Table 3 have already shown an increased
speed of the pass-through in the post-break period once we control for country
and market characteristics. In order to test whether or not the pass-through process has become more homogenous in the euro zone, we regress two types of convergence measuresb and r convergenceon post-break, country, and rate
dummies. r-convergence measures the variation of the long-run multiplier and is
dened as jhj,t hMean,tj/hMean,t.20 Therefore, a negative coecient for this dummy
indicates less variation and consequently more convergence. The results are also
shown in Table 3. The r-convergence regression reveals a slight increase in heterogeneity in the post-break period for the monetary policy approach. No signicant
changes are detectable for the cost-of-funds approach. Whereas country dummies
do not play a role, we nd a signicantly negative dummy for short-term corporate
loans indicating more convergence in this market. For current account and savings
account rates the positive coecient indicates higher heterogeneity. The b-convergence measure is borrowed from the empirical growth literature.21 According to
this concept, growth rates are negatively related to initial levels. Thus, countries
with initially low multipliers for a given retail rate should see them growing faster
over time, while countries with initially higher multipliers see them growing less
fast or even declining. We nd some evidence for b-convergence for the monetary
policy approach but not for the cost-of-funds approach. The dummy for shortterm corporate loans is again positive. In sum, the evidence for a more homogeneous pass-through processwith the eventual exception of short-run corporate
lendingremains very limited and lends some support to our No-No-Maybe
hypothesis.

5. Pass-through and banking market structure


5.1. Pass-through determinants
In this section we investigate potential determinants of the pass-through process
by making use of the estimated multipliers. We particularly analyze the role of
nancial market structures after controlling for macroeconomic determinant factors. Regarding macroeconomic variables, it has been advocated that money market rate volatility is positively correlated with bank interest rate margins (Saunders
19

This argument has also been made by the European Commissions Economic and Financial Committee in a special report (EFC, 2002) and by Cabral et al. (2002).
20
Note that the subscripts indicate country j (Austria to Spain) and period t (pre-break, post-break).
Thus, each long-run multiplier is compared to the cross-country average long-run multiplier for its
respective period.
21
See Durlauf and Quah (1999).

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

481

and Schumacher, 2000) and negatively correlated with the pass-through (Cottarelli
and Kourelis, 1994; Mojon, 2000; de Bondt et al., 2002). Other relevant macroeconomic control variables are structural ination, economic growth, and nancial
development.22 Secondly, we collect four sets of variables describing the nancial
structure of the euro zone: (1) market structure concerning size and concentration,
(2) bank protability and bank health, (3) availability of alternative nance, and
(4) foreign bank activities. Following the tradition in the literature, we regress the
pass-though determinants directly on the multipliers.23 Our analysis concentrates
on the multipliers obtained from the monetary policy approach for three reasons:
First, retail interest rates collected by the ECB are very heterogeneous across
Europe, e.g. with respect to the maturity structure of the loans or deposits. Thus,
selecting a cost-of-funds rate with a common maturity for all countries is rather
arbitrary. Second, the monetary policy rate has gained importance relative to costof-funds rate. Finally, as monetary policy aects both, the cost-of-funds and the
retail rate, the monetary policy approach already covers an important part of the
cost-of-funds channel, particular when taking into account forward looking behavior by market participants.
5.2. The role of competition
In the spirit of the industrial organization approach to banking, higher concentration and lower competition are expected to lead to a faster and larger passthrough. It is theoretically not clear whether a concentration ratio or a Herndahl
index is the most appropriate measure for market concentration (see Berger and
Hannan, 1989). Therefore, we opt for an internal competition index that averages the ve-rm concentration ratio (CR5) and the Herndahl index.24 To account
for dierences across markets these indicators are obtained for both, loan and
deposits markets. In a similar way we construct a foreign competition index
which is composed of the number of foreign bank branches and subsidiaries and
the share of non-resident intermediated liabilities (loans) or non-resident intermediated assets (deposits), respectively.
Table 4 presents the results. We nd that more internal competition leads to a
signicant reduction in price rigidities as indicated by the internal competition
22
Financial development is typically measured by a ratio of nancial assets or liabilities to GDP with
the view that the higher the ratio, the higher the degree of nancial system development and the faster
the pass-through. The two most common measures are broad money to GDP, reecting nancial deepening on the asset side, and private credit to GDP, the most comprehensive indicator of nancial
activities of intermediaries. We have employed both measures but report only the results for credit to
GDP as this indicator performs better in the regressions.
23
In contrast to the speed regression reported in Table 3, we now focus directly on the multipliers. This
choice is driven by the fact that increased competition could lead to an increase in both, the short- and
long-run multiplier, so that speed may not change at all.
24
Each variable is transformed into an index number ranging from 0 to 1 with 1 indicating the highest
expected impact on the pass-through multipliers. For example, a high concentration ratio results in a
low index number, which enters our internal competition variable. Consequently, we expect a positive
coecient for this variable in the panel regression.

482

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

coecient in the regressions for the impact multiplier and for the 1-month multipliers. This coecient does, however, become insignicant from three months
onwards and no long-run impact can be established. Surprisingly, the coecient
for foreign competition is signicant but has the wrong sign in all regressions. This
result as well as the missing long-run eect of internal competition could be caused
by dierences between the loan and deposit markets. Theoretically, the competition
eect should be more pronounced for deposit rates as these are less aected by
informational imperfections than loans, which are more prone to moral hazard and
adverse selection problems. To capture these dierences we introduce deposit slope
dummies for both competition indicators. Our modied regressions now show a
signicant positive impact of more internal and foreign competition in the deposit
market in the short- and in the long run. Furthermore, the results indicate that less
competition leads to faster downward than upward adjustment of deposit rates.
This type of asymmetry is in line with our theoretical priors. Regarding loans, a
signicant impact of internal competition can no longer be established. This result
probably points to the more important role of other market imperfections such as
the lack of contestability, switching cost, informational imperfections, and thus
credit rationing in loan markets.25
With respect to the macroeconomic variables our results conrm the positive
role of reduced volatility in the money market. This is, however, only true for loan
rates and even there the eect diminishes over time as a reduction in volatility does
not aect the long-run pass-through. In deposit markets, lower volatility decreases
both the short- and long-term pass-through. High ination typically leads to a
lower pass-through in deposit markets but not in lending markets, possibly reecting the role of market power. High growth is uniformly found to increase the passthrough in the long- but not in the short-run. Financial development plays only a
marginally positive role.
After controlling for nancial market structure and macroeconomic dierences,
some retail rate dummies still remain statistically signicant. In line with industrial
organization reasoning, short-term corporate loans show a higher pass-through
while current and savings accounts markets exhibits more stickiness. Country characteristics are also persistent. Cecchetti (1999) hypothesizes that cultural and legal
dierences may obstruct the convergence process in the euro zone. To test this
hypothesis we include Cecchettis legal family dummies, in particular a dummy for
the German legal system (used for Austria and Germany), for the Scandinavian
legal system (used for Finland), and for the English legal system (used for Ireland).
The results suggest that in particular in the German legal system the pass-through
is signicantly lower.
25
A remaining puzzle is the statistically signicant and negative coecient for foreign competition in
the loan market. This could possibly indicate that foreign banks prefer to enter markets with low passthrough.

N4short-term loans
to enterprises
N7current account
deposits

credit to GDP

growth

ination  deposit

money market
volatility  deposit
ination

foreign competition 
deposit
money market volatility

internal competition 
deposit
foreign competition

internal competition

Constant

Independent variablesa

0.083
2.262
0.162
3.435
0.026
1.119
0.063
2.433
0.036
1.381
0.051
0.508
0.029
0.678
0.192
3.358

0.289
2.102

0.492
2.871
0.213
2.223

0.601
3.587
0.146
1.407
0.196
1.963
0.488
3.370
0.346
2.838
0.094
2.685
0.165
3.642
0.016
0.698
0.114
3.878
0.046
1.840
0.024
0.251
0.047
1.145
0.183
3.353

impact multiplier

Dependent variable

0.126
2.372
0.243
3.563
0.006
0.185
0.110
2.913
0.014
0.365
0.232
1.584
0.138
2.246
0.285
3.445

0.419
2.107

0.435
1.753
0.300
2.161

+1%
shock
0.573
2.307
0.178
1.155
0.303
2.045
0.625
2.910
0.313
1.729
0.137
2.630
0.240
3.580
0.016
0.466
0.162
3.717
0.024
0.646
0.193
1.346
0.155
2.563
0.276
3.415

+1%
shock

1 month multiplier

0.126
2.372
0.243
3.563
0.006
0.185
0.110
2.913
0.014
0.365
0.232
1.584
0.138
2.246
0.285
3.445

0.419
2.107

0.435
1.753
0.300
2.161

1%
shock
0.573
2.307
0.178
1.155
0.303
2.045
0.625
2.910
0.313
1.729
0.137
2.630
0.240
3.580
0.016
0.466
0.162
3.717
0.024
0.646
0.193
1.346
0.155
2.563
0.276
3.415

1%
shock

0.122
2.042
0.267
3.465
0.029
0.739
0.122
2.863
0.016
0.367
0.198
1.197
0.211
3.030
0.375
3.998

0.563
2.503

0.509
1.812
0.227
1.443

+1%
shock
0.711
2.603
0.064
0.378
0.420
2.577
0.885
3.751
0.513
2.583
0.140
2.452
0.266
3.610
0.044
1.187
0.203
4.256
0.000
0.010
0.144
0.911
0.239
3.581
0.360
4.052

+1%
shock

3 months multiplier

Table 4
Structural determinants of the interestrate passthrough for the monetary policy approach: The role of competition

1%
shock

0.631
2.197
0.076
0.426
0.397
2.316
0.536
0.875
2.270
3.523
0.561
2.680
0.096
0.115
1.525
1.910
0.249
0.250
3.070
3.220
0.012
0.029
0.296
0.740
0.111
0.197
2.496
3.923
0.045
0.028
1.001
0.648
0.241
0.189
1.391
1.137
0.187
0.217
2.558
3.088
0.399
0.384
4.059
4.101
(continued on next page)

0.430
1.460
0.224
1.356

1%
shock

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


483

Table 4 (continued )

foreign competition 
deposit
money market volatility

internal competition 
deposit
foreign competition

internal competition

Constant

0.094
1.532

0.605
2.635

0.484
1.688
0.185
1.155

+1%
shock

0.696
2.498
0.006
0.032
0.469
2.825
0.918
3.815
0.472
2.330
0.110
1.895

+1%
shock

6 months multiplier

dependent variable

independent variablesa

Adjusted R2

Scandinavian legal
system
English legal system

German legal system

0.300
4.536
0.211
2.989
0.228
2.864
0.611
3.173
35.9%

0.175
3.136
0.173
2.367
0.197
2.392
0.461
2.352
29.5%

impact multiplier

Dependent variable

N9savings accounts

Independent variablesa

0.080
1.254

0.468
1.951

0.345
1.153
0.180
1.077

1%
shock

0.244
3.023
0.227
2.145
0.291
2.441
0.418
1.473
37.0%

+1%
shock

0.561
1.936
0.015
0.082
0.437
2.525
0.824
3.289
0.581
2.752
0.100
1.646

1%
shock

0.371
3.783
0.271
2.583
0.334
2.836
0.582
2.039
40.1%

+1%
shock

1 month multiplier

0.371
3.783
0.271
2.583
0.334
2.836
0.582
2.039
40.1%

1%
shock

0.057
0.874

0.539
2.207

0.350
1.149
0.154
0.901

+1%
shock
0.577
1.948
0.069
0.375
0.529
2.994
0.851
3.325
0.445
2.063
0.073
1.178

+1%
shock

12 months multiplier

0.244
3.023
0.227
2.145
0.291
2.441
0.418
1.473
37.0%

1%
shock

0.060
0.876

0.352
1.361

0.242
0.748
0.125
0.692

1%
shock

0.255
2.785
0.163
1.357
0.350
2.597
0.274
0.853
39.7%

+1%
shock

0.493
1.587
0.078
0.407
0.523
2.822
0.751
2.801
0.636
2.813
0.082
1.267

1%
shock

0.454
4.215
0.228
1.983
0.411
3.178
0.524
1.673
45.9%

+1%
shock

3 months multiplier

0.482
4.249
0.231
1.908
0.456
3.343
0.319
0.968
44.1%

1%
shock

0.010
0.128

0.441
1.570

0.213
0.608
0.068
0.348

0.485
1.442
0.151
0.723
0.565
2.814
0.876
3.012
0.696
2.838
0.014
0.203

longrun multiplier

0.271
2.823
0.164
1.303
0.396
2.800
0.060
0.178
38.2%

1%
shock

484
H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

0.287
3.643
0.051
1.286
0.137
3.147
0.052
1.191
0.118
0.701
0.269
3.790
0.412
4.312
0.249
2.675
0.110
0.899
0.384
2.793
0.027
0.082
45.0%

0.282
3.750
0.065
1.716
0.216
4.430
0.036
0.874
0.059
0.368
0.295
4.347
0.399
4.395
0.442
4.024
0.176
1.501
0.451
3.414
0.276
0.863
50.7%

0.283
3.436
0.047
1.143
0.134
2.951
0.079
1.728
0.181
1.025
0.227
3.060
0.441
4.421
0.287
2.946
0.091
0.714
0.392
2.730
0.233
0.679
42.7%

0.283
3.611
0.064
1.639
0.224
4.416
0.061
1.403
0.123
0.736
0.258
3.645
0.425
4.505
0.509
4.443
0.163
1.332
0.457
3.323
0.042
0.126
48.9%

0.285
3.401
0.074
1.771
0.145
3.149
0.086
1.848
0.082
0.455
0.296
3.919
0.430
4.234
0.230
2.322
0.056
0.431
0.358
2.449
0.271
0.778
45.2%

0.276
3.453
0.087
2.176
0.224
4.329
0.070
1.587
0.016
0.095
0.321
4.444
0.417
4.322
0.421
3.602
0.125
0.998
0.431
3.071
0.017
0.051
50.9%

0.291
3.279
0.080
1.800
0.146
2.986
0.093
1.899
0.140
0.736
0.261
3.259
0.462
4.281
0.277
2.630
0.033
0.242
0.319
2.058
0.449
1.215
40.9%

0.289
3.452
0.099
2.351
0.247
4.552
0.073
1.582
0.073
0.404
0.295
3.898
0.444
4.390
0.524
4.277
0.115
0.878
0.395
2.686
0.139
0.389
48.2%

0.231
2.392
0.050
1.030
0.129
2.426
0.125
2.350
0.149
0.719
0.215
2.472
0.483
4.124
0.248
2.172
0.002
0.013
0.282
1.673
0.567
1.413
35.4%

0.229
2.518
0.071
1.545
0.239
4.058
0.104
2.059
0.075
0.387
0.252
3.072
0.463
4.223
0.518
3.898
0.087
0.612
0.364
2.281
0.229
0.592
43.4%

Note: The sample size for each regression is 102 observations pooled across periods (pre-break, post-break), countries (Austria to Spain), and rates (N1 to
N10).
a
For each independent variable the estimated coecient is reported in the top row and the t-statistic is reported in italics in the bottom row. The estimates are based on an OLS regression.

adjusted R2

Scandinavian legal
system
English legal system

German legal system

N4shortterm loans
to enterprises
N7current account
deposits
N9savings accounts

credit to GDP

growth

ination  deposit

money market
volatility  deposit
ination

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


485

486

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

5.3. The role of banking market structure and monetary policy eectiveness
The pass-through analysis can also be employed to investigate the role of nancial markets in the eectiveness of monetary policy transmission. Kashyap and
Stein (1997) and Cecchetti (1999) have argued that a composite measure of monetary policy eectiveness, consisting of measures of bank health, number of
banks, and availability of alternative nance, can explain the high level of monetary policy eectiveness in Europe. They argue that small and unhealthy banks are
more heavily aected by shocks and that the transmission to the real economy will
be stronger the less alternative nance is available. We employ a similar eectiveness indicator. As we concentrate on the nancial market side of the transmission
process only, we do make some adjustments, particularly by adding a measure for
banking market competition. Our eectiveness indicator is thus composed of four
dimensions: Internal competition, alternative nance, bank health, and importance
of small banks.26 The rationale might be as follows: A monetary tightening might
shift the loan supply curve especially of small and unhealthy banks. Whether this
leads to a fast increase in lending rates depends on the elasticity of the loan
demand curve and the degree of lending rate stickiness or credit rationing in the
credit market. For any given monetary shock, the less competitive the market and
the less elastic the demand for loans, i.e. the less alternative nance is available, the
larger will be the increase in lending rates.27 Consequently, we expect a positive
impact of our eectiveness indicator on the pass-through.
In Table 5 the results of our regression analyses are reported. Overall, our eectiveness indicator has the expected positive sign and is signicant for all multipliers
except the impact multiplier. Moreover, the eectiveness indicator becomes more
important the longer the time-horizon of the multiplier. As far as foreign competition is concerned, the coecient has the wrong sign but is not statistically signicant. However, when introducing a deposit slope dummy, foreign competition has
a positive eect in the deposit markets. With respect to the macroeconomic variables, we can again conrm the positive role of reduced money market rate volatility particularly over the rst six months. In a similar manner, both, higher
ination and less nancial development lead to a slower pass-through, but the
eects are only statistically signicant in the rst few months. During this time
economic growth seems unimportant. However, in the longer term, higher growth
26
More specically, we dene eectiveness as the equally weighted average of internal competition,
alternative nance, and bank size and health. The denitions for the 3 elements in this indicator are:
Internal competition CR5 Herfindahl=2 with both variables based on either loans or deposits,
respectively; alternative finance publicly traded firms stock market capitalization intermediated
liabilities=3; bank size and health loan provisions operating cost number of banks=3. Again,
for building the index each included variable was transformed into an index number ranging from 0 to 1
with 1 indicating the highest expected impact on the pass-through multipliers.
27
This contradicts the view that more alternative nancesuch as high stock market capitalization
will lead to a more competitive banking market and thus faster pass-through. In fact, it appears that our
indicators for the availability of alternative nance are negatively correlated with the pass-through multipliers thus supporting the loan demand-side view.

0.099
0.531

0.213
0.824
0.784
1.707

0.345
1.340
0.605
1.328
0.236
1.667
0.286
1.432
0.256
2.025
0.093
2.552
0.159
3.342
0.021
0.825
0.129
3.863
0.053
2.080
0.059
0.583
0.050
1.181
0.215
3.818

impact multiplier

Dependent variable

foreign competition 
deposit
money market volatility 0.086
2.315
money market
0.159
volatility  deposit
3.328
Ination
0.036
1.456
ination  deposit
0.074
2.807
Growth
0.043
1.677
credit to GDP
0.087
0.854
N4short-term loans
0.033
to enterprises
0.762
N7current account
0.205
deposits
3.582

foreign competition

eectiveness  deposit

Eectiveness

Constant

Independent variablesa

0.131
2.435
0.239
3.454
0.008
0.230
0.125
3.285
0.024
0.640
0.283
1.919
0.145
2.312
0.304
3.666

0.139
0.516

0.021
0.057
1.152
1.734

+1%
shock
0.130
0.345
1.019
1.524
0.356
1.714
0.285
0.970
0.176
0.949
0.136
2.553
0.229
3.273
0.007
0.178
0.183
3.750
0.032
0.845
0.244
1.654
0.163
2.604
0.321
3.876

+1%
shock

1 month multiplier

0.131
2.435
0.239
3.454
0.008
0.230
0.125
3.285
0.024
0.640
0.283
1.919
0.145
2.312
0.304
3.666

0.139
0.516

0.021
0.057
1.152
1.734

1%
shock
0.130
0.345
1.019
1.524
0.356
1.714
0.285
0.970
0.176
0.949
0.136
2.553
0.229
3.273
0.007
0.178
0.183
3.750
0.032
0.845
0.244
1.654
0.163
2.604
0.321
3.876

1%
shock

0.135
2.289
0.253
3.325
0.004
0.093
0.140
3.343
0.014
0.332
0.255
1.572
0.228
3.312
0.383
4.211

0.108
0.365

0.179
0.436
1.766
2.422

+1%
shock
0.007
0.018
1.521
2.097
0.405
1.798
0.367
1.153
0.344
1.707
0.144
2.494
0.247
3.267
0.026
0.665
0.223
4.197
0.000
0.000
0.208
1.296
0.254
3.734
0.401
4.467

+1%
shock

3 months multiplier
1%
shock

0.005
0.012
1.346
1.754
0.340
1.425
0.118
0.409
0.378
1.214
0.403
1.885
0.107
0.117
1.722
1.918
0.236
0.236
2.936
2.947
0.011
0.013
0.259
0.310
0.128
0.211
2.907
3.754
0.042
0.027
0.970
0.623
0.295
0.253
1.725
1.493
0.202
0.228
2.781
3.167
0.408
0.422
4.249
4.438
(continued on next page)

0.200
0.462
1.627
2.114

1%
shock

Table 5
Structural determinants of the interest-rate pass-through for the monetary policy approach: The role of banking market structure and monetary policy
eectiveness

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


487

Table 5 (continued )

0.116
0.386

0.259
0.624
1.875
2.539

foreign competition 
deposit
money market volatility 0.108
1.813

foreign competition

eectiveness  deposit

Eectiveness

Constant

+1%
shock

0.091
0.219
1.660
2.253
0.427
1.866
0.346
1.068
0.296
1.446
0.117
1.984

+1%
shock

6 months multiplier

Dependent variable

Independent variablesa

Adjusted R2

Scandinavian legal
system
English legal system

German legal system

0.249
3.715
0.306
2.153
0.166
1.897
0.530
2.391
31.6%

0.159
2.827
0.306
2.146
0.140
1.560
0.380
1.740
27.9%

impact multiplier

Dependent variable

N9savings accounts

Independent variablesa

0.095
1.515

0.021
0.066

0.397
0.914
1.870
2.420

1%
shock

0.221
2.726
0.428
2.075
0.207
1.600
0.293
0.930
35.8%

+1%
shock

0.187
0.428
1.583
2.056
0.350
1.464
0.277
0.820
0.411
1.922
0.105
1.713

1%
shock

0.295
2.993
0.458
2.196
0.234
1.812
0.419
1.286
37.1%

+1%
shock

1 month multiplier

0.295
2.993
0.458
2.196
0.234
1.812
0.419
1.286
37.1%

1%
shock

0.071
1.118

0.067
0.210

0.367
0.829
1.797
2.280

+1%
shock
0.206
0.463
1.597
2.029
0.481
1.968
0.284
0.823
0.270
1.231
0.079
1.262

+1%
shock

12 months multiplier

0.221
2.726
0.428
2.075
0.207
1.600
0.293
0.930
35.8%

1%
shock

0.078
1.160

0.191
0.566

0.587
1.259
2.049
2.467

1%
shock

0.233
2.617
0.564
2.490
0.223
1.571
0.014
0.041
42.2%

+1%
shock

0.351
0.754
1.730
2.100
0.422
1.651
0.142
0.393
0.456
1.989
0.090
1.366

1%
shock

0.360
3.368
0.577
2.552
0.263
1.881
0.198
0.560
44.7%

+1%
shock

3 months multiplier

0.390
3.449
0.522
2.181
0.320
2.161
0.033
0.088
42.3%

1%
shock

0.014
0.197

0.246
0.682

0.840
1.684
2.555
2.875

0.593
1.184
2.214
2.501
0.381
1.388
0.107
0.275
0.492
1.998
0.027
0.375

long-run multiplier

0.250
2.659
0.528
2.208
0.279
1.861
0.200
0.547
40.0%

1%
shock

488
H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

0.269
3.497
0.024
0.592
0.154
3.643
0.053
1.271
0.173
1.056
0.288
4.145
0.417
4.520
0.230
2.549
0.558
2.434
0.250
1.736
0.303
0.862
48.0%

0.261
3.386
0.045
1.112
0.234
4.341
0.041
0.985
0.125
0.767
0.314
4.542
0.436
4.782
0.344
3.166
0.582
2.533
0.287
2.022
0.111
0.309
50.0%

0.265
3.287
0.020
0.479
0.151
3.413
0.080
1.834
0.235
1.368
0.246
3.382
0.445
4.618
0.268
2.835
0.540
2.250
0.258
1.714
0.563
1.534
45.6%

0.265
3.301
0.044
1.053
0.236
4.190
0.064
1.488
0.192
1.128
0.273
3.784
0.460
4.821
0.411
3.624
0.535
2.228
0.300
2.021
0.325
0.866
47.9%

0.267
3.250
0.048
1.127
0.162
3.577
0.088
1.981
0.132
0.753
0.315
4.242
0.433
4.398
0.213
2.212
0.495
2.024
0.229
1.494
0.597
1.594
47.9%

0.254
3.093
0.069
1.606
0.244
4.239
0.076
1.728
0.079
0.453
0.341
4.624
0.455
4.673
0.322
2.776
0.531
2.166
0.267
1.763
0.412
1.074
49.7%

0.269
3.109
0.050
1.104
0.163
3.434
0.099
2.114
0.193
1.044
0.284
3.634
0.460
4.437
0.260
2.562
0.554
2.150
0.173
1.068
0.841
2.133
44.5%

0.268
3.116
0.077
1.714
0.261
4.333
0.082
1.762
0.141
0.779
0.315
4.083
0.477
4.683
0.421
3.469
0.554
2.157
0.221
1.390
0.573
1.429
47.2%

0.200
2.156
0.011
0.225
0.148
2.908
0.138
2.743
0.206
1.042
0.246
2.942
0.473
4.263
0.232
2.140
0.683
2.474
0.099
0.575
1.092
2.587
40.9%

0.203
2.191
0.039
0.809
0.246
3.792
0.119
2.393
0.158
0.809
0.277
3.342
0.488
4.452
0.402
3.080
0.671
2.431
0.148
0.868
0.812
1.882
43.4%

Note: The sample size for each regression is 102 observations pooled across periods (pre-break, post-break), countries (Austria to Spain), and rates (N1 to
N10).
a
For each independent variable the estimated coecient is reported in the top row and the t-statistic is reported in italics in the bottom row. The estimates are based on an OLS regression.

Adjusted R2

Scandinavian legal
system
English legal system

German legal system

N4shortterm loans
to enterprises
N7current account
deposits
N9savings accounts

credit to GDP

Growth

ination  deposit

money market
volatility  deposit
Ination

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492


489

490

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

is positively related to the pass-through. As usual, short-term corporate lending has


a signicantly faster pass-through, while deposit rates react slower. Regarding
asymmetries, we nd them present but not dramatic. While the overall results thus
support the view that nominal, real, and structural convergence could go some way
towards a more uniform pass-through process, the inclusion of the legal system
dummies conrms the Cecchetti-proposition that unless legal structures are harmonized across Europe, nancial structures will remain diverse, and so will monetary transmission mechanisms. In particular, the dummy for the German legal
system shows again a highly signicant negative eect on the pass-through for all
multipliers and all types of shocks.

6. Conclusions and outlook


The objective of this study is to provide a more uniform analysis of the eurozone pass-through process. Our study makes a number of contributions to the
literature. First, many dierences in the results of pass-through studies can be
reconciled if the timing of structural breaks is endogenously determined rather
than postulated. This is particularly important because we nd that structural
breaks occur often before the introduction of the single currency. Moreover, changes in structural features such as reduced money market rate volatility may explain
the improved pass-through in some countries better than some mysterious EMU
eect. Secondly, we have shown that it is important to distinguish clearly between
the monetary policy and the cost-of-funds approach. Both approaches deliver
dierent results but complementary insights. Thirdly, we have conducted both
analyses by selecting an optimal pass-through model for all sub-periods and all
national retail interest rates. Forth, we nd ample evidence for short-run rigidity of
banking product prices, indicating imperfectly competitive markets. Fifth, we have
shown that the pass-through has become faster in response to monetary policy
impulses but not in response to changes in cost of funds. Sixth, by identifying a
number of banking markets with a less than perfect long-run pass-through, our
results indicate that market imperfections such as credit rationing are an important
feature in European retail banking. Seventh, when using pass-through measures as
indicators for euro-zone retail banking market integration, the view that the markets are still fragmented is supportedwith the eventual exemption of short-term
lending to enterprises. Finally, our analysis of the structural determinants of the
pass-through process reveals that some convergence can be achieved by means of
nominal, real, and structural convergence. Competition, banking market integration, a stable monetary policy regime, a more homogeneous growth performance etc. are important variables for homogenizing the pass-through and thus
monetary transmission in the euro zone. Nevertheless, legal and cultural dierences
may continue to preclude full convergence.
Our results should remind policy makers that these dierences matter for both,
monetary policy and integration policy formulation. As monetary policy will have
to deal with these dierences in the foreseeable future, our results are useful to

H. Sander, S. Kleimeier / Journal of International Money and Finance 23 (2004) 461492

491

policy makers as they provide a deeper knowledge of the dierential impact of


monetary policy on retail lending rates and allow a more precise assessment of the
impact of any given shock across individual euro-zone countries and retail products. As our results highlight and quantify the role of structural factors such as
competition, banking market integration, and a stable monetary policy regime for
producing more homogeneity in euro-zone retail banking markets, they provide
guideposts for policy initiatives to promote European nancial market integration.
Finally, all aspects of our analysis will be of particular relevance in the future when
countries with even more dierent economic and nancial structures are becoming
members of both, the European Union and the euro zone.

Acknowledgements
We are grateful for constructive comments on earlier versions of this paper by
the participants of the Finance and Consumption Workshop of the European University Institute in Florence on May 1314, 2003; the Workshop on Bank Competition, Risk, Regulation and Markets of the Bank of Finland in Helsinki on May
2627, 2003; and the Workshop on Banking and Finance in an Integrating Europe
of De Nederlandse Bank and the Utrecht School of Economics in Amsterdam on
August 2526, 2003. In particular, we proted from the comments by Robert De
Young of the Federal Reserve Bank of Chicago FED, Nico Valckx of the ECB,
and Rachel Campbell of the Maastricht University. As always, the remaining
errors are ours.

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