Has the Transmission of Policy Rates to Lending Rates Changed in the Wake of the Global Financial Crisis?

• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/infi.12074
• Date: 01 December 2015

Has the Transmission of Policy

Rates to Lending Rates Changed

in the Wake of the Global

Financial Crisis?

Leonardo Gambacorta, Anamaria Illes

and Marco Jacopo Lombardi

Bank for International Settlements.

Abstract

Central banks of major advanced economies have maintained a very

accommodative monetary policy stance in the last few years. However,

concerns have surfa ced that the trans mission of low p olicy rates to

lending rates has been weaker than in the past. Has the transmission of

policy rates to lending rates been impaired by the global financial

crisis? To answer this question, we first estimate standard cointegrating

equations linking policy and lending rates for non-financial firms in

Italy, Spain, the United Kingdom and the United States. We then test

for structural change in the cointegration parameters, finding strong

evidence of a break after Lehman Brothers’default. Such a structural

break is owed to a strong increase in the mark-up of the lending rate

over the policy rate that standard models assume constant in the long

The authors would like to thank Dietr ich Domanski, Dubravko Miha ljek, Christian Upper and , in

particular, two anonymous referees for th eir useful comments and sugge stions. The views expres sed

are those of the authors and do not nece ssarily reflect those of th e BIS.

International Finance 18:3, 2015: pp. 263–280

DOI: 10.1111/infi.12074

© 2015 Bank for International Settlements. InternationalFinance © 2015 John Wiley & Sons Ltd

run. The structural shift is explained by compounding the lending rate

equation with measures of risk.

I. Introduction

As a response to the global financial crisis and the ensuing deep recession, central

banks of major advanced e conomies brought their poli cy rates to near-zero and

engaged in non-st andard monetary policy actions a imed at providing economic

stimulus. Such u nconventional polic y measures have be en largely succe ssful in

keeping interest rates on government bonds at l ow levels (Meaning and Zhu 2011).

However, borrowing by households and non-fin ancial corporations rema ins sub-

dued. Although this is not sur prising in the after math of a financial crisis when

agents need to repair overburdened balan ce sheets, some have expressed conce rn

that the reduction in po licy rates has not bee n transmitted to household s and firms

–especially small ones –which then face ‘excessively high’borrowing costs.

The goal of this paper is to investigate the pass-through of monetary poli cy to

lending rates to n on-financial firms in maj or advanced economies prior to a nd after

the global financial crisis. Are lending rates unusually high in relation to policy rates

and, consequently, to the desired monetary policy stance? Has the financial crisis

impaired the transmission of monetary policy to lending rates? And if so, what have

been the causes? This pape r attempts to answer thes e questions.

The literature on the pass-th rough of monetary p olicy to lendi ng rates is vast.

The early contributions by Bori o and Fritz (1995) and Cottarelli and Kourelis (1994)

found that the deg ree of competition a nd the structu ral characte ristics of th e

banking system are key f actors in the transmis sion of monetary po licy to lendin g

rates. Only a few country-le vel studies have examined in dividual bank-le vel data

(Weth 2002; Gambacorta 2008). The bulk of the empirical literature has investigated

the comovements of pol icy and lendi ng rates in the framework of cointegr ated time

series models (Engle and Granger 1987).

1

To account for frictions in the transmi s-

sion mechanism, s ome studies have considered asy mmetric effects in th e short-run

adjustment (see, e.g. Gambacorta and Iannotti 2007). D ue to the varying nature of

the banking systems ac ross its component countries, several stu dies have focused on

the euro area (Hofmann 2006). Some of the most recent contributions also cover the

post-crisis period: Belke et al. (2013) employ harmonized data for euro-area

countries and find considerable cross-country differences.

2

Karagiannis et al.

(2010) focus instead on differences between the euro area and the United States,

1

For an extensive survey of the empirica l literature, see de Bondt (2005 ).

2

Darracq-Pari

es et al. (2014) also i nvestigate the cross-country h eterogeneity in euro-area countries.

264 Leonardo Gambacorta et al.

© 2015 Bank for International Settlements. InternationalFinance © 2015 John Wiley & Sons Ltd