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The Response of Retail Interest Rates to Factor Forecasts of Money Market Rates in Major European Economies

Author

Listed:
  • Anindya Banerjee
  • Victor Bystrov
  • Paul Mizen

Abstract

The recent financial crisis has underlined that banks no longer simply accumulate deposits and lend a fraction to their clients. Instead they use interbank markets and structured finance to increase their loan book. This has implications for the understanding of interest rate pass through since a large number of interest rates and macro variables influence the retail rates they set on loans and deposits. This paper uses Stock-Watson factor forecasts to predict market interest rates which are then used as the basis for setting retail rates. We find a significant role for forecasts of future interest rates in determining short- and long-run pass through, and we argue that models which do not include future rates are misspecified.

Suggested Citation

  • Anindya Banerjee & Victor Bystrov & Paul Mizen, 2010. "The Response of Retail Interest Rates to Factor Forecasts of Money Market Rates in Major European Economies," Working Papers 025, COMISEF.
    • Handle: RePEc:com:wpaper:025
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    Cited by:

    1. repec:cnb:ocpubc:fsr1011/4 is not listed on IDEAS
    2. Aristei, David & Gallo, Manuela, 2014. "Interest rate pass-through in the Euro area during the financial crisis: A multivariate regime-switching approach," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 273-295.
    3. Iva Cecchin, 2011. "Mortgage Rate Pass-Through in Switzerland," Working Papers 2011-08, Swiss National Bank.

    More about this item

    Keywords

    forecasting; factor models; interest rate pass-through;
    All these keywords.

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