This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

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Empirical estimates of an error-correction model, nested in a partial adjustment framework, show that the euro had a temporary impact, via mergers and acquisitions activity, on corporate bond issuance in the euro area. In addition, a permanent effect is found for corporate bonds issued by non-monetary financial corporations. For the first five years of the single currency, these effects are estimated to have been up to 2� and around 5� percentage points, respectively, of the annual bond market growth. Other significant determinants of corporate bond issuance are economic activity, the cost of bond issuance relative to other sources of external finance and mergers and acquisitions.

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