Dynamic hierarchical models for monetary transmission

Abstract

JEL Classification: JEL. C13, C32, C53, E43, E52.Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary policy with changes in their administered rates, on both deposits and lendings. In this paper we provide a dynamic modeling for describing how administered bank interest rates react in response to changes in money market rates, in a multicountry setting: in addition, by means of hierarchical equations, we take into account how such changes are affected by the macroeconomic fundamentals of each country. The paper applies the proposed models to interest rates on different loans (to corporates and families) in seven European economies, showing how the monetary policy and the specific situation of each country have differently impacted lendings across time. KEYWORDS forecasting bank interest rates, dynamic time series models, hierarchical models 1 Stat Anal Data Min: The ASA Data Sci Journal, 2017; 10(1):54-71 wileyonlinelibrary.com/sam