Heterogeneous Monetary Transmission Process in the Eurozone: Does Banking Competition Matter? (version préliminaire)

Mercredi | 2013-09-18

Aurélien LEROY – Désiré KANGA – Yannick LUCOTTE

This paper examines the implications of banking competition for the interest rate channel in Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long and short-run relationship between money market rates, bank interest rates, and our competition proxy, the Lerner index, we find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and, (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostering in Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of monetary policy and an increase of heterogeneity in Eurozone, we control and extend our results by considering many other aspects than market structure, which can affect interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of pass-through.