Restoring euro area monetary transmission: Which role for government bond rates?

Abstract

For a number of euro area periphery countries, this paper explores the stability of the link between bank lending rates and yields on sovereign bonds. A stable relationship between these interest rates is important for the ECB's attempt to restore monetary policy transmission by conducting unconventional measures that aim at bringing down government bond rates. Using vector autoregressive models with time-varying parameters, we find that bank lending rates adjusted incompletely to changes in government bond rates before the onset of the financial crisis, while their responsiveness has even further weakened thereafter. Thus, our results suggest that periphery bank lending rates have not only decoupled from policy rates after mid-2008, but also from yields on sovereign bonds.Keywords ECB • Unconventional monetary policy • Euro area crisis • Interest rate link • Time-varying parameter vector autoregressive modelsWe would like to thank two anonymous referees for helpful comments and suggestions. We are also grateful to the participants of the

Unconventional Monetary Policy Shocks in the Euro Area and the Sovereign-Bank Nexus

“…Industrial production and the dynamics of prices are supposed to reflect the macroeconomic development. The Eurosystem's volume 12 See also Dell'Ariccia et al (2018b) or Hristov et al (2019), among others, for a discussion. 13 A large quantity of asset purchases by the central bank under a program like the APP can be seen as a credible commitment by monetary policy to keep interest low in the future.…”

Unconventional Monetary Policy Shocks in the Euro Area and the Sovereign-Bank Nexus

“…18 Kapetanios et al (2012) and Hristov et al (2019) adopt the identification scheme of Baumeister and Benati (2013) to identify unconventional monetary policy shocks in the U.K. and the euro area.…”