Structural breaks in the lending interest rate pass-through and the euro

This paper investigates whether size and speed of the pass-through of market rates into shortterm business lending rates have increased in the wake of the introduction of the euro. Allowing formultiple unknown structural breaks we find two in four EMU countries, and in the UK as well, anda single one in five other countries. The pattern of dates fits national banking systems adjustingslowly to the new monetary regime and suggests caution in associating structural changes to theintroduction of the euro. The estimated equilibrium pass-through in the last break-free period is onaverage more incomplete, hinting at a reduced effectiveness of the single monetary policy. Thisresults runs against the economic intuition that a reduced volatility in money market rates is boundto mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; therun up to Basel 2 and a deterioration of competition in loan markets could be the motivations.Caution in extrapolating to more recent periods these findings is suggested by the differencesbetween the unharmonized and the new harmonized retail rates.