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Sander (2001) Asymmetric Adjustment of Commercial Bank Interest Rates in The Euro Area An Empirical Investigation Into Interest Rate Pass-Through
Sander (2001) Asymmetric Adjustment of Commercial Bank Interest Rates in The Euro Area An Empirical Investigation Into Interest Rate Pass-Through
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by
Harald Sander
and
Stefanie Kleimeier
Abstract:
This study provides an empirical analysis of asymmetries in the transmission of policy rate innovations on bank
lending rates. Our study extends on the existing literature by conducting cointegration analyses that explicitly
test for structural breaks and for asymmetric upward and downward adjustment in interest rates. Comparing the
empirical results for 12 European countries reveals that the speed of adjustment of lending rates to policy rate
changes differs widely within the EMU, implying that the ECB is still confronted with an asymmetric EMU that
The authors are from the University of Applied Sciences Cologne and the Maastricht University, respectively.
S. Kleimeier would like to acknowledge the financial support from METEOR.
1. Introduction
Since January 1, 1999 the new European Central Bank has to conduct a “one-size-fits-all” monetary
policy based on her assessment of the average economic conditions of the 11 member countries of the European
Monetary Union (EMU). Next to the usual issues and controversies in monetary policy making this implies three
new challenges: (1) determining the appropriate average monetary policy in case of diverging economic
conditions in the Euro area, (2) dealing with possible asymmetric effects of that monetary policy in different
member countries, i.e. a divergent monetary transmission mechanism which (3) is most likely subject to
dramatic changes (convergence?) as financial market integration and restructuring alongside EMU evolves.
While the first challenge has always been at the heart of the controversies about a common currency and
attracted a lot of public attention in the first half of 1999 as the cyclical position of the Euro area member
countries appeared to diverge1 , the second issue has only recently become an important topic in empirical
research. While the latter development is to be welcomed, challenge #3 should remind us that judgements about
the workings of the monetary mechanism that are based on past data could be profoundly misleading in the
context of a regime change. Our paper focuses on the latter two challenges by providing evidence on
symmetries, asymmetries, and changes in the monetary mechanism in EMU member countries with particular
Since Franco Modigliani (1963) the monetary mechanism has been described to consist of two parts: the
financial market reaction and the wage-price mechanism. While many recent studies have been examining the
impact of monetary policies on the real economy (e.g. Ramaswany and Sloek 1997) our study concentrates on
the financial market reaction. There are a number of good reasons to do so: First, while there is evidence that the
wage-price process is different across Europe, the Lucas principle suggests that this very process may adopt to
the European focus of the ECB’s monetary policy (Dornbusch et.al. 1998). Financial markets, however, may be
more resistant to convergence. E.g. Cecchetti (1999. p. 22) argues that “...differences in financial structure are
the proximate cause for these national asymmetries in the monetary policy transmission mechanism”, and adds
that “…unless legal structures are harmonized across Europe, financial structures will remain diverse, and so will
1
the monetary transmission mechanism”. Kleimeier and Sander (2000) show that the attempt to integrate the
European financial markets by means of regulations (like the 2nd Banking Directive) alone has brought little
convergence in lending conditions so far. Secondly, given the high proportion of bank finance in Europe relative
to the US/UK - as shown in Table 1 - the “lending channel” is an important element in the monetary mechanism
in Europe as has been suggested by the advocates of the credit view (e.g. Bernake and Gertler 1995, Kashyap
and Stein 1994). If loans and bonds are imperfect substitutes in the balance sheets of banks and firms, and firms
cannot simply access the capital markets but have to rely on bank finance, the transmission of monetary policy
impulses is necessarily linked to bank behaviour. Third, if the structure of the financial system matters as a
“conveyer” of monetary policy, these structural differences can lead to asymmetries in European financial
markets reaction and thus monetary policy transmission. In Germany, for example, the close bank-firm
relationship tends to weaken the policy-determined interest rate – lending rate link, while in economies like the
Our study provides an empirical analysis of asymmetries in European financial markets by means of
examining how innovations in policy rates are passed onto lending rates as an important element for the speed of
the monetary transmission process. Until recently, the literature has often neglected this issue. Exemptions are
e.g. Cotarelli and Kourelis (1994), who focus on the role of lending rate stickiness and its structural
determinants, Cotarelli, Ferri, and Generale (1995), BIS (1995) and IMF, World Economic Outlook October
(1996). Dornbusch et. al. (1998) review this literature with respect to the financial market reaction in potential
EMU member countries and find that the characteristics of the financial system “....go some way towards
explaining the observed asymmetries in the transmission mechanism”. Our study extends on this literature in
1. The link between policy rates and lending rates is analysed in a cointegration approach that tests and allows
for structural breaks in order to examine the impact of changing conditions on financial market performance
so far.
2. The speed of adjustment to monetary policy innovations are measured by country differences in the error
1
In mid-1999 public discussions about increasingly diverging development in production and prices in the EMU
member countries abound. The ECB examines this issue in its July 1999 monthly bulletin.
2
3. Recent research has shifted toward analysing asymmetric adjustment in interest rates (see Enders and
Granger, 1998; and Scholnick 1996). As adjustments to innovations in monetary policy may differ when the
lending rate is above or below its long run equilibrium level we test also for asymmetric upward and
downward adjustment.
In sum, the relationship between national policy interest rates and commercial bank prime lending rates
of EMU member countries is analysed by employing cointegration methodology for the 10 EMU member
countries plus the United Kingdom and Greece in the period of 1984 to 1998, allowing for endogenously
determined structural breaks and asymmetric adjustment towards a long-run equilibrium. Our results will show
that the speed of adjustment of lending rates to innovations in policy interest rates still differs widely across
countries. In five countries we find either no cointegration (France, Germany, Ireland) or statically insignificant
error correction processes (Finland, Spain). In the remaining seven countries adjustment processes are partly
symmetric (UK, Portugal, Italy) and partly asymmetric (Belgium, Luxembourg, Netherlands, Greece). Provided
the introduction of the common currency will not eliminate these differences in the transmission mechanisms
over time, the ECB will be facing the difficult task of formulating and implementing a single monetary policy in
a Euro area where the effects of this policy will remain different across member countries.
In order to analyse the relationship between central bank policy rates and commercial bank lending
rates, monthly interest rates have been collected from the CD-ROM version of the IMF's International Financial
Statistics (IFS) for the following European countries: Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, and Spain as EMU member states and Greece and the United Kingdom
as non-EMU member states.2 As lending rates the rates listed in line 60p of the IFS have been used whereas the
central bank discount rates listed in line 60 have been used as policy rates. Exceptions to this sampling procedure
were the following: Due to changes in central bank policy, rates from line 60a were used for France as of July
1989 and for the Netherlands as of January 1994. For the United Kingdom, no policy rates were available and
money market rates of line 60b have been used instead. For Luxembourg, the Luxembourg lending rates were
2
Austria, Denmark, and Sweden are not included in this study since monthly lending rates were not available
from the IFS for the full period under investigation.
3
used but Belgian rates were used as policy rates due to the monetary union between Belgium and Luxembourg.
Descriptive statistics for each interest series are presented in Table 2 for the full sample period of January 1985
to December 1998 and for the post-break period used in the cointegration analysis of January 1994 until
December 1998. The time-series of the respective series are shown in Figure 1.
The cointegration analysis applied in this study proceeds in three steps as promoted by Engle and
Granger’s (1987) followed by an extension of Engle and Granger’s basic error correction model, which allows
differentiation between an upward and a downward adjustment of interest rates. Before cointegration analysis
can proceed, it must be ensured that all interest rate time series have unit roots. As Kleimeier and Sander (2000)
have shown, time series of European money market and lending rates exhibit structural breaks in the early 1990s
which reflect the changes in the European banking market brought about by the Second Banking Directive. Such
a structural break has two specific implications for cointegration analysis. First, if a structural break at an à priori
unknown point in time is present in a time series, the unit root tests proposed by Engle and Granger (1987) have
very little power. Better specified test statistics as proposed by Banerjee, Lumsdaine, and Stock (1992) which are
consistent even in the presence of structural breaks will therefore need to be employed. Second, a time period
free of structural breaks in the cointegration relationship has to be identified otherwise the interpretation of the
cointegration vector will result in misleading conclusions. As Quandt (1960), Andrews (1993), Diebold and
Chen (1996), and Hansen (1992) show, a supremum F test allows the exact determination of the timing of such a
structural break. Once the break has been determined, the complete cointegration analysis can then be conducted
for the pre and post-break periods separately. In particular, our study will focus on the post-break period only.
More formally, our methodology can be described as follows: In order to establish whether interest
rates or spreads are I(1), two sets of test statistics will be employed based on regressions on levels as well as first
differences for each national interest rate series zt . The first set includes the t- and F-tests proposed by Engle and
Granger. The second set includes tests particularly designed to provide reliable results in the presence of a
structural break. The t- and F-tests are based on a level regression includes next to lagged observations of the
interest rate in question zt-1 also a trend variable T and on the corresponding regression for first differences:
4
2 2
(1B) ∆ zt = α + β ∆zt-1 + χ ∆ zt-1 + ξ T + εt
The null hypothesis stating that the series follow random walks corresponds to H0 : β=0 for the t-statistic and to
In the presence of structural breaks at an à-priory unknown point in time, the above two unit root tests
have very little power. Better specified are the following test statistics proposed by Banerjee, Lumsdaine, and
Stock (1992). Using equation (1A) and (1B), recursive minimum τ-statistics can be calculated in order to test the
null-hypothesis of β=0 3 . Furthermore, sequential unit root tests that distinguish between a shift in the mean or the
trend of the series can be calculated based on the following regressions for levels and first differences:
where D indicates a dummy variable. For the mean-shift tests, D is coded as 1 if t > k and 0 otherwise. For the
trend-shift tests, D is coded as t if t > k and 0 otherwise. Here, both minimum τ-tests regarding H0 : β=0 and
maximum F-tests regarding H0 : β=ξ=0 can be calculated and compared to the critical values 4 .
Once the I(1) characteristic has been established, cointegration testing can commence. First, it has to be
established whether or not the cointegration vector is characterised by a structural break and if so, when this
break takes place. This is important since in the presence of a structural break, the standard cointegration tests
such as those proposed by Engle and Granger have low power, i.e. the rejection frequency of the ADF test is
clearly reduced (e.g. Gregory et. al., 1996). The cointegration relationship is described by equation (3) using the
3
This unit root test is based on a series of sub-samples which span one quarter of the total sample each and
comprise data from t = 1 to k, t = 2 to k+1, until t = n to T. The recursive min-τ is found as the smallest t(k/T)
over all sub-samples. To reject the null-hypothesis, the calculated min τ-value which has to be smaller than the
critical value.
4
In particular, a series of regressions is run on the full sample so that different k can be chosen in accordance
with Banerjee et al’s suggestion to move k through the mid-70% of the total sample. Similar to the recursive test,
a minimum τ-value is calculated as the smallest t(k/T) over all sub-samples.
5
lending rate y t for the individual country as the dependent variable and the policy rate xt of the same country as
(3) y t = γ1 + γ2 xt + u t
To test for structural breaks a supremum F (supF) test is calculated. This test was first proposed by Quandt
(1960) and has recently been the focus of various studies (e.g. Andrews 1993, Diebold and Chen 1996, Hansen
1992). This test can be seen as a rolling Chow test and is more flexible than the standard Chow test because it
allows simultaneously to test for the significance and the timing of a structural break in the cointegration
relationship 5 . If a break is present, the cointegration analysis will proceed focussing on the post-break period
only.
Following Engle and Granger (1987), Durbin-Watson (DW) statistics are obtained from equation (3),
followed by Dickey-Fuller (DF) and augmented Dickey-Fuller (ADF) tests. The Dickey-Fuller tests are based on
(4) ∆u t = -φ u t-1 + εt
where the t-statistic for the estimated coefficient φ provides an indication regarding the cointegration of the two
Once cointegration is established, the corresponding error correction model (ECM) will be estimated in
order to investigate the speed of adjustment of lending rates to changes in policy rates. Here, both a symmetric
ECM as well as an asymmetric ECM is estimated. This distinction allows us to investigate possible differences
in adjustment when rates are above versus below their equilibrium level. To find the correct specification of the
5
In particular, a series of standard Chow tests are conducted for a series of different break points k, which move
through the mid-70% of the sample. SupF equals the largest Chow F-statistic and is compared to critical values
as reported by Hansen (1992). The sequence of F-statistics can give an indication about the timing of the break.
6
ECM, the procedure suggested by Engle and Granger (1987) is followed. First, an unrestricted vector
with a maximum lag structure of i=12. From this regression, the significant lagged first differences of the
exogenous and endogenous variables are identified and included in the final ECM in combination with any error
correction terms ECT obtained from the estimated errors that were found significant in the cointegration
regressions stated in equation (3). Note also that the same lag-structure is used for the symmetric as for the
asymmetric ECM. The speed of adjustment in the symmetric ECM can now be found by regressing
The estimated coefficient ϕ1 of the ECT measures the speed of adjustment. For example an estimated ϕ1 of -0.2
indicates that if there is a shock to the variable y t which changes its value relative to the equilibrium relationship
to the cointegrated series xt , then one fifth of the divergence is eliminated in the following period.
In the asymmetric model, a distinction is being made to whether the interest rates are below or above
their equilibrium levels 6 . The ECT from the cointegration regression is separated into two components such that
ECT +t =0 otherwise
and
-
(9) ECT t = ECT t if ECTt < mean(ECT)
-
ECT t =0 otherwise
The speed of adjustment in the asymmetric ECM can now be found by regressing
6
A similar approach has been used by Scholnick (1996), who however focuses on short-run dynamics different
to the ones used here is equation (6) and (7).
7
-
(9) ∆y t = ψ0 + ψ1 ECT +t-1 + ψ2 ECT t-1 + Σi ψyi ∆y t -i + Σi ψxi ∆xt -i + εt
The estimated coefficient ψ1 of ECT + measures the speed of adjustment when rates are above their equilibrium
-
level, whereas the estimated coefficient ψ2 of ECT measures the speed of adjustment when rates are below their
equilibrium level. A result of ψ1 = -0.3 versus ψ2 =-0.6 would indicate that if a shock to variable y t which raises
its value relative to the equilibrium relationship to the cointegrated series xt , it takes only half as long for the
divergence to be eliminated than if a shock to variable y t decreases its value relative to the equilibrium
relationship to the cointegrated series xt . Finally, an F-test regarding the null-hypothesis ψ1 = ψ2 indicates
whether the speed of adjustment is significantly different for above- and below-equilibrium levels.
Table 3 provides an overview of the different unit root test statistics employed in this study to test
whether or not the interest rate series under consideration fulfil the requirement of being I(1). Overall, we are
confident that cointegration analysis can proceed for all national series with the exception of Ireland, where
lending rates appear to be I(0). Thus, special care should be taken when interpreting the results for Ireland in the
Table 4 provides evidence for the presence of a structural break in the cointegration relationship in each
country with the exception of France. For the other countries the break occurs between August 1987 and
December 1993. These breaks are similar to those detected by Kleimeier and Sander (2000) and can be attributed
to the changes in the national banking systems as brought about by the second banking directive. As it is the
objective of this study to focus on the transmission mechanism as it was in place right at the introduction of the
EMU, the cointegration analysis will only focus on the post-break period. Consequently, a sample period free of
breaks and common to all countries will be selected which ranges from January 1994 until December 1998.
8
The main results of our study are summarized in Table 5 and visualised in Figure 2. Looking first at the
Durbin-Watson and the Dickey-Fuller test statistics reveals that on the broadest level, two groups of countries
exist in Europe: Those for which cointegration could be established implying an existing lending channel for the
transmission of monetary policy and those for which cointegration could not be established. France, Germany,
and Ireland belong to the latter group, whereas the remaining countries belong to the former group. Note,
however, whereas the evidence in favour of cointegration is strong for Belgium, Italy, the Netherlands, Portugal,
and Spain, only marginal evidence could be found for Finland, Luxembourg, Greece, and the United Kingdom.
For these nine countries for which some level of cointegration could be detected, the estimated coefficients of
the error correction terms in the symmetric and asymmetric ECM reveal a further separation of countries into
two groups: Those for which the adjustment of lending rates to a policy rate shock is symmetric and those for
which the adjustment is asymmetric. For Finland, Italy, Portugal, Spain, and UK the F-test reported in the last
column of Table 5 is not significant and therefore ϕ1 , the coefficient of the symmetric ECT is relevant. In these
five countries, the speed of adjustment differs widely. In Finland, Italy, and Spain the coefficient is
insignificantly different from zero indicating that even if cointegration could statistically be found, the time of
adjustment is infinitively long. For Portugal and the UK, the estimated coefficient of –0.121 and –0.166
respectively indicate that lending rates fully adjust to shocks in policy rates within 6 to 8 months. In Belgium,
Luxembourg, the Netherlands, and Greece the adjustment of lending rates to policy rate changes is asymmetric
in nature as the F-statistics in Table 5 indicates. For all countries in this group, the adjustment is faster if rates are
above the equilibrium level as is indicated by the finding that ψ1 is smaller than ψ2 . It is interesting to note that
the divisions between cointegrated versus non-cointegrated interest rates and between symmetrically versus
asymmetrically adjusting interest rates do not correspond neither to the distinction into EMU members and non-
members, nor to that of EMU-core and non-core members (see also Dornbusch et. al., 1998). Overall, our
findings indicate the presence of cross-country differences in the adjustment processes of commercial bank
interest rates to policy rate changes within and outside the Euro area.
In sum, our study confirms that monetary policy in the Euro area is still to be conducted under the
conditions of an "asymmetric EMU" of which the differences in the way the different banking systems in Euro
area countries work are arguably among the most important ones 7 . We found not only that the speed of
adjustment is different across countries of actual and prospective EMU member countries, but also that this
7
For a most recent statement on the "asymmetric EMU" see Corsetti and Pesenti in their September 1999 paper
presented at the Brookings panel.
9
speed differs in terms of an asymmetric upward and downward adjustment process. Such asymmetries are
present in some but not all countries under investigation, suggesting the necessity to include asymmetric models
in the analysis. While optimists hope that the elimination of currency risks may contribute to an institutional
harmonization within EMU the evidence provided here suggests that for the nearer future asymmetries will
10
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12
Table 1: The Relative Importance of Bank Finance in Europe
Panel B: The Relative Importance of Bank Finance in the Euro Area, USA and Japan in June 1999a
(as percentage of GDP)
Euro Area USA Japan
Bank Loans 100.4 48.4 107.0
Outstanding domestic debt securities 88.8 164.6 126.5
- issues by corporates 3.3 29.0 14.6
- issued by financial institutions 31.0 45.4 18.8
- issued by the public sector 54.5 90.2 93.1
Stock Market Capitalization 71.1 163.3 137.7
Source: ECB Monthly Bulletin, January 2000, p.39, own calculations
a
All data are June 1999 except for stock market capitalization which are October 1999
13
Table 2: Monthly Policy and Lending Rates for EMU Members and Non-Members
COUNTRY Policy Rates Lending Rates
Mean Standard Mean Standard
Period Deviation Deviation
Belgium
01:1985 – 12:1998 6.58 2.75 10.10 2.22
01:1994 – 12:1998 3.29 0.87 7.86 1.00
Finland
01:1985 – 12:1998 6.75 1.83 9.03 5.18
01:1994 – 12:1998 4.56 0.59 6.49 1.17
France
01:1985 – 12:1998 7.35 2.58 8.95 1.54
01:1994 – 12:1998 4.09 0.98 7.13 0.76
Germany
01:1985 – 12:1998 4.50 1.85 10.43 1.71
01:1994 – 12:1998 3.25 0.96 10.12 1.01
Greece
01:1985 – 12:1998 19.19 1.81 23.73 3.82
01:1994 – 12:1998 18.19 2.71 21.79 3.41
Ireland
01:1985 – 12:1998 9.06 2.44 9.25 3.10
01:1994 – 12:1998 6.50 0.54 6.27 0.62
Italy
01:1985 – 12:1998 10.60 3.03 13.31 2.61
01:1994 – 12:1998 7.15 1.53 10.68 1.78
Luxembourg
01:1985 – 12:1998 6.58 2.75 7.13 1.17
01:1994 – 12:1998 3.29 0.87 5.87 0.57
Netherlands
01:1985 – 12:1998 4.93 1.90 8.99 2.26
01:1994 – 12:1998 3.19 0.99 6.80 0.92
Portugal
01:1985 – 12:1998 13.40 5.66 17.45 5.67
01:1994 – 12:1998 7.25 2.33 11.39 2.97
Spain
01:1985 – 12:1998 10.74 3.56 11.87 3.69
01:1994 – 12:1998 6.70 1.80 7.72 1.96
United Kingdom
01:1985 – 12:1998 9.11 3.26 9.33 3.11
01:1994 – 12:1998 6.06 0.92 6.38 0.69
14
Table 3: Unit Root Tests for Time Series of Monthly National Interest Rates from January 1985 until December 1998
Country Levels First Differences
t(b) F recursive mean-shift mean-shift trend-shift trend-shift t(b) F recursive mean-shift mean-shift trend-shift trend-shift
min τ min τ max F min τ max F min τ min τ max F min τ max F
Policy Rates
Belgium -1.72 1.50 -1.72 -1.89 8.78 -1.98 9.04 -9.14 41.81 -9.14 -7.77 49.48 -7.82 49.82
Finland -1.35 1.08 -1.41 -2.50 17.24 -3.25* 21.02* -7.40 27.47 -7.40 -6.28 35.26 -6.31 32.93
France -1.69 2.21 -1.69 -3.18 17.36 -3.87* 22.13* -7.77 30.18 -7.77 -6.78 35.14 -6.82 33.61
Germany -0.66 0.81 -1.27 -1.89 17.62 -2.51* 18.92* -8.39 35.16 -8.39 -7.17 61.43 -7.22 53.60
Greece -0.71 1.16 -1.43 -2.13 8.85 -2.26 8.83 -8.62 37.14 -8.62 -7.37 49.20 -7.42 47.41
Ireland -1.97 3.11 -2.49 -2.15 8.44 -2.18 9.09 -7.43 27.63 -7.44 -6.28 29.54 -6.33 30.00
Italy -1.21 1.13 -1.69 -1.53 8.65 -1.62 10.37 -6.78 23.02 -6.95 -5.79 28.89 -5.82 28.42
Luxembourg -1.72 1.50 -1.72 -1.89 8.78 -1.98 9.04 -9.14 41.81 -9.14 -7.77 49.48 -7.82 49.82
Netherlands -1.07 0.68 -1.16 -1.87 15.01 -2.38 15.98 -6.70 22.48 -6.70 -5.88 33.55 -5.91 30.96
Portugal -2.78 3.89 -2.79 -2.48 11.63 -2.68 13.15 -14.13 99.87 -14.13 -11.91 112.90 -12.00 110.74
Spain -2.50 3.70 -2.57 -2.39 7.37 -2.40 7.22 -6.01 18.06 -6.01 -5.06 21.25 -5.10 26.73
United Kingdom -1.56 1.29 -1.56 -1.72 9.06 -1.69 10.27 -9.64 46.48 -9.64 -8.13 53.06 -8.18 56.58
Lending Rates
Belgium -1.47 1.10 -1.49 -2.50 10.93 -2.77 11.42 -8.70 37.86 -8.70 -7.38 42.00 -7.43 43.51
Finland -1.63 1.34 -1.25 -1.82 14.48 -2.61* 16.74* -6.45 20.84 -6.45 -5.56 29.89 -5.60 25.89
France -1.41 1.01 -1.47 -2.14 10.77 -2.52 11.64 -9.23 42.58 -9.23 -7.86 48.43 -7.91 53.33
Germany -0.23 1.02 -1.41 -1.19 19.11* -1.92* 22.55* -6.97 24.32 -6.97 -5.88 49.94 -5.93 46.68
Greece -0.35 3.68 -1.05 -2.24 9.90 -2.62 10.31 -8.36 34.95 -8.36 -7.09 40.31 -7.13 42.22
Ireland -3.93* 7.72* -3.93* -3.31 26.47* -3.35* 24.16* -9.00 40.51 -9.00 -7.59 54.52 -7.64 50.28
Italy -2.64 3.61 -3.03* -2.90 7.68 -2.96 9.29 -5.91 17.54 -5.92 -5.12 25.59 -5.13 26.20
Luxembourg -1.41 1.00 -1.48 -1.77 10.78 -2.37 13.32 -9.02 40.67 -9.02 -7.60 50.42 -7.65 49.16
Netherlands -0.93 0.68 -1.27 -1.87 13.22 -2.30 13.44 -8.83 39.10 -8.83 -7.64 50.31 -7.68 50.17
Portugal -1.37 0.94 -1.41 -1.58 9.70 -1.70 13.51 -9.63 46.36 -9.63 -8.14 57.78 -8.20 61.72
Spain -2.00 2.53 -2.00 -1.96 6.70 -2.24 7.51 -7.00 24.49 -7.00 -5.90 26.96 -5.94 32.07
United Kingdom -1.72 1.54 -1.72 -1.82 7.62 -1.70 10.59 -6.94 24.18 -6.94 -5.85 28.55 -5.89 30.46
Note: t(b) and F give unit-root test-statistics which ignore the possible presence of a structural break. The remaining test statistics allow for the presence of a structural break of unknown timing. The critical values for 100
observations are as follows: -3.46 (1%), -2.88 (5%), -2.57 (10%) for the t(b) test; 8.73 (1%), 6.49 (5%), 5.47 (10%) for the F test; -4.62 (2.5%), -2.88 (5%), -2.57 (10%) for the recursive min τ test; -5.07 (2.5%), -4.80 (5%), -
4.54 (10%) for the mean-shift min τ test; 20.83 (2.5%), 18.62 (5%), 16.20 (10%) for the mean-shift max F test; -4.76 (2.5%), -4.48 (5%), -4.20 (10%) for the trend-shift min τ test; and 16.30 (2.5%), 14.80 (5%), 13.64 (10%)
for the trend-shift max F test. * indicates that based on the respective test statistics these series might be considered I(0) at the 5% level.
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Table 4: Structural Break Test in the National Cointegration Vector between
Policy Rates and Lending Rates from January 1985 to December 1998
Country supF Break point
Belgium 509.3 March 1991
Finland 181.7 January 1989
France 12.0 August 1994
Germany 354.0 February 1993
Greece 140.3 May 1993
Ireland 20.5 September 1992
Italy 78.8 September 1992
Luxembourg 122.1 March 1991
Netherlands 32.8 December 1993
Portugal 41.5 May 1992
Spain 63.7 August 1987
United Kingdom 15.9 September 1992
Note: Based on the critical values reported by Hansen (1992) the breaks for all countries
except France are significant.
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Table 5: Cointegration of Lending Rates (LR) and Policy Rates (PR) in the Period between January 1994 until December 1998
Country Cointegration Regression DW ADF(k)1 ϕ1 ψ1 ψ2 F-test for H0 : ψ1 = ψ2
(t-statistics) (t-statistic)1 (t-statistic)1 (t-statistic)1 (significance level)
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