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Interest rate pass-through, monetary policy rules and macroeconomic stability☆

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In this paper, the authors analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete, and empirically characterize and compare the interest rate passthrough process in the euro area and the U.S.
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This article is published in Journal of International Money and Finance.The article was published on 2010-03-01 and is currently open access. It has received 104 citations till now. The article focuses on the topics: Interest rate & Credit channel.

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比较金融系统 = Comparing financial systems

TL;DR: In the United States and the United Kingdom competitive markets dominate the financial landscape, whereas in France, Germany, and Japan banks have traditionally played the most important role as discussed by the authors. But the form of these financial systems varies widely.
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The interest rate pass-through in the Euro area during the global financial crisis.

TL;DR: This article used panel vector autoregressive (VAR) models to explore the widening of retail bank interest rate spreads that emerged in the course of the global financial crisis and found that the interest rate pass-through was generally complete on impact before the outbreak of the financial crisis, but became significantly distorted in the period thereafter, which hampered the effectiveness of monetary policy.
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The interest rate pass-through in the euro area during the sovereign debt crisis

TL;DR: In this paper, the authors investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period.
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Excess liquidity, bank pricing rules, and monetary policy

TL;DR: In this paper, the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections was studied. And the authors argued that excess liquidity may impart greater stickiness to the deposit rate in response to a monetary contraction and induce an easing of collateral requirements on borrowers.
References
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Co-integration and Error Correction: Representation, Estimation and Testing

TL;DR: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples.
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Distribution of the Estimators for Autoregressive Time Series with a Unit Root

TL;DR: In this article, the limit distributions of the estimator of p and of the regression t test are derived under the assumption that p = ± 1, where p is a fixed constant and t is a sequence of independent normal random variables.
Journal ArticleDOI

Testing for a Unit Root in Time Series Regression

TL;DR: In this article, the authors proposed new tests for detecting the presence of a unit root in quite general time series models, which accommodate models with a fitted drift and a time trend so that they may be used to discriminate between unit root nonstationarity and stationarity about a deterministic trend.

Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models / Søren Johansen

S Johansen
TL;DR: In this paper, the authors present the likelihood methods for the analysis of cointegration in VAR models with Gaussian errors, seasonal dummies, and constant terms, and show that the asymptotic distribution of the maximum likelihood estimator is mixed Gausssian.
Journal ArticleDOI

Estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models

Søren Johansen
- 01 Nov 1991 - 
TL;DR: In this article, the authors derived the likelihood analysis of vector autoregressive models allowing for cointegration and showed that the asymptotic distribution of the maximum likelihood estimator of the cointegrating relations can be found by reduced rank regression and derives the likelihood ratio test of structural hypotheses about these relations.
Related Papers (5)
Frequently Asked Questions (19)
Q1. What are the contributions in this paper?

In this paper the authors analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. 

In this paper the authors focus on the possibility of sunspot fluctuations that arise from self-fulfilling revisions to expectations. 

Sight deposits, saving deposits and time deposits amounted to 38 percent, 31 percent and 31 percent of total deposits held by non-financial corporations and households in the euro area, respectively. 

In particular, monetary policy rules give rise to a determinate equilibrium if the implied response to inflation is sufficiently strong. 

if nominal rates do not adjust sufficiently, a rise in expected inflation leads to a decrease in the real interest rate, which stimulates aggregate demand. 

While the pass-through from money market rates to bank deposit rates is nearly complete in the U.S., it amounts on average to 0.32 in the euro area. 

Assuming that at least the long-run pass-through from policy rates to market rates is close to complete, the overall pass-through to interest rates more generally is likely to be higher than to retail rates. 

The long-run pass-through ranges between 0.27 for saving deposits with a maturity of less than three months and 0.66 for time deposits with a maturity of up to two years. 

For the U.S., the long-run pass-through, λ, is nearly complete for most categories of deposit rates and on average approximately 0.57 for lending rates. 

The authors start by testing for unit roots in their retail and monetary policy rate series, where the authors take the three-month money market rate as a proxy for the policy rate. 

If the limited pass-through to retail rates is indeed due to the formation of relationships and implicit contracts, it follows that market rates in general should follow policy rates more closely. 

The time period the authors consider starts in January 1995 and ends in September 2003, because no longer aggregated time series are available for the euro area. 

There the long-run pass-through ranges between 0.43 for shortterm loans to households and 0.69 for business loans with a maturity of up to one year. 

the upper bound on κπ associated with determinacy appears to be extremely large for plausible parameterizations and is satisfied by empirically estimated interest rate rules. 

1/(1+ψ) determines the immediate pass-through from the bond yield, which is assumed to be the interest rate targeted by monetary policy, and ψν/(1 + ψ) determines the persistence of the deposit rate. 

The composite consumption good, Ct, is a CES aggregate of the quantities ofdifferentiated goods, Ct(i), where i ∈ (0, 1): Ct = (∫ 1 0 Ct(i) −1 di ) −1 . 

their empirical results suggest that κ̄π, the lower bound for κπ, consistent with a determinate equilibrium, lies between unity and 1.75 in the U.S.8 

In the euro area, the average long-run pass-through appears to be lower than in the U.S. Consequently, larger values of κπ are needed for determinacy. 

Gaĺı et al. (2004) introduce rule-ofthumb consumers in a sticky-price model and show that the Taylor principle is no longer sufficient for determinacy.