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

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 unconvent...

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Bibliographic Details
Published in:Empirical economics 2019-09, Vol.57 (3), p.991-1021
Main Authors: Hristov, Nikolay, Hülsewig, Oliver, Siemsen, Thomas, Wollmershäuser, Timo
Format: Article
Language:English
Subjects:
Banking
Bond markets
Bonds
Econometrics
Economic crisis
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Euro
Eurozone
Finance
Government
Government bonds
Insurance
Interest rate risk
Interest rates
Management
Monetary policy
Public finance
Responsiveness
Statistics for Business
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Summary: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.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-018-1467-y