A less effective monetary policy in the wake of EMU? Evidence from lending rates passthrough

An approach to search for structural breaks in lending rates pass-through in the wake of EMU is proposed and implemented for Italy and Portugal. Breakpoints cluster in the second semester 1999 and the equilibrium pass-through on short term lending is, in contrast with earlier research, sizeably lower in the post-break period; in the Italian case, the adjustment to the equilibrium is however faster. The recently proposed distinction between monetary policy and cost-of-funds approaches does not yield different break-points. These results challenge the widely held view that EMU has in its wake enhanced the effectiveness of monetary transmission. A strengthened relationship lending could at least partly explain the reduced equilibrium pass-through in the Italian case.