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

This study analyzes the interest rate pass-through (IRPT) from money market rates to various loan rates for up to 12 countries of the European Monetary Union (EMU) between 2003 and 2011 based on fully harmonized data. We first test for a cointegrating relationship between loan rates and the Euro OverNight Index Average (EONIA) and allow for different nonlinear patterns in the short-run adjustment of loan rates based on smooth transition models. Our results identify considerable differences in the size of the pass-through (PT) with respect to different loan rates or countries. In the majority of cases, the pass-through is incomplete, and the dynamics of loan adjustment are different for reductions and hikes in money market rates. A key finding is that the pass-through is more homogenous and more nearly complete for loans to non-financial corporations than to households.