A Dynamic Factor Model of Interest Rate Pass Through for four Large Euro Area Countries

Location
J G Smith building, Room 210
Dates
Monday 14th March 2016 (12:00-13:00)
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This event is part of the Dept of Economics Internal Seminar Series.

Speaker: Prof Anindya Banerjee

Speaker biography

Professor Anindya Banerjee joined the Department of Economics in January 2008 as Professor in Economics. Before coming to Birmingham he was Professor at the European University Institute in Florence and Fellow of Wadham College, Oxford. Professor Banerjee received his Ph.D. from the University of Oxford.  His interests lie in time series econometrics, including factor models, and the econometrics of integrated panel data.

Abstract

In this paper we seek to relate the movements of mortgage and business lending rates offered by banks in four euro area countries (Germany, France, Spain and Italy) to changes in underlying funding costs driven by implementation of monetary policy after the crisis and the greater perception of risk. Since there are many different sources of risk, and many financial instruments affected by policy, we will utilise a dynamic factor methodology that can summarise the influence of a large number of correlated variables. We implement a new methodology based on Bernanke, Boivin and Eliasz (2005) and extended by Yamamoto (2012), Bai and Ng (2013) and others. Most of the literature on monetary policy transmission uses BBE, this allows examination of impulse responses to a policy rate conditioned by factors, but it does not provide structural identification of latent factors. We attempt to provide economically meaningful identification of the latent factors and thereby capture the movement of key interest rate variables to shocks in the underlying policy rate (suitably identified.) Structural stability tests investigate the stability of the monetary transmission mechanism over the period of the crisis.