Published in:Banque de France Working Paper ; No. 361
Extent:
1 Online-Ressource (44 p)
Language:
English
DOI:
10.2139/ssrn.2008632
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments February 1, 2012 erstellt
Description:
Much of the literature on interest rate pass through assumes banks set retail rates by observing current market rates. We argue instead that banks anticipate the direction of short-term market rates when setting interest rates on loans, mortgages and deposits. If anticipated rates - captured by forecasts of short-term interest rates or future markets - are important, the empirical specifications of many previous studies that omit them could be misspecified. Including such forecasts requires a detailed consideration of the information in the yield curve and alternative forecasting models. In this paper we use two methods to extract anticipated changes to short-term market rates - a level, slope, curvature model and a principal components model - at many horizons, before including them in a model of retail rate adjustment for four interest rates in four major euro area economies. We find a significant role for forecasts of market rates in determining interest rate pass through; alternative specifications with futures information yield comparable results. We conclude that it is important to include anticipated changes in market rates to avoid misspecification in pass through estimation