The Empirical Literature Sample Clauses

The Empirical Literature. The literature includes a huge number of empirical studies on the estimation of the degree of interest rate pass-through in the loan rates. Despite the diversity of approaches and data sets, the majority of the studies conclude that change in the policy rate is only partially passed through to loan rates in the short run, although the estimates of the degree of pass-through differ among studies. In one of the early studies, Xxxxxxxx (1966) tests the adjustment speeds of commercial loan rates compared to open market rates and demonstrates that the loan rates adjust relatively slowly. Xxxxxx and Xxxxx (1992) investigates over one million individual loans in the U.S. from 1977 to 1988 and concludes that the adjustment process of loan rates is sticky. From the recent literature, by using harmonized ECB bank interest rate statistics, Xxxxxxxx and Xxxxxx (2006) investigates the pass-through between market interest rates and bank interest rates in the Euro area and shows that shifts in money- market rates, including the policy rate, are not completely passed through to retail lending rates. Furthermore, Xxxxx et al. (2007) argues that interest rate pass-through in the euro area is incomplete even after controlling for differences in bank soundness, credit risk, and the slope of the yield curve.4 4 Mojon (2000), Xxxxxx and Xxxxxxx (2001), Xxxxxx and Xxxxxxxxx (2002), Xxxxxxxx-Xxxx and Xxxxxxx (2003), Xxxxxxx (2004), Gambacorta (2004), Xxxxx et al (2005), are some of the other studies confirming the same fact for different countries. While all these studies confirm the presence of sticky loan rates as a well-established fact, the literature may provide different explanations for its roots. According to some researchers, this type of financial market imperfections can be explained by the existence of long-term relationships between banks and customers. For instance, Xxxxx and Xxxxxx (1980) and Xxxxxx and Xxxxx (1992) argue that the benefit from banker customer relationships that are predominately continuous arises from banks offering an implicit interest rate insurance to risk averse customers by keeping loan rates less variable than market rates. This means that loan rates are sticky with the consequence that the pass through from changes in money market rates to loan rates is incomplete. On the other hand, Xxxxx et al. (2007) argues that the level of competitiveness of the financial market is the key factor in understanding the incomplete pass-through in loan rate...