Structural Factor Analysis of Interest Rate Pass Through in Four Large Euro Area Economies

Abstract

In this paper we examine the influence of monetary policy decisions of the ECB on mort- gage and business lending rates offered by banks in the four major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilize a dynamic factor model, which allows examination of impulse responses to policy shocks conditioned upon structurally identified latent factors. The distinct feature of this paper is that it explores the effects of three policy transmission lines - short-term rates, long-term rates and perceived risk - ultimately directed towards bank lending rates. The analysis of the pass through is carried out in pre-crisis and post- crisis sub-samples to demonstrate the changing influence of different policy measures on lending rates.