Convergence of retail banking interest rates to households in euro area: time-varying measurement and determinants

Abstract

This study measures time-varying progress of retail banking (to households) interest rates convergence and examines its determinants for twelve countries of the euro area, between 2003 and 2014. First, we measure convergence of interest rates using five different time-varying indicators, namely asymmetric dynamic conditional correlation (ADCC), beta convergence, sigma convergence, variance ratio, and dynamic cointegration. We then estimate panel regressions for each type of interest rate to identify the determinants of convergence over pre-crisis and crisis periods. The estimated ADCC is employed as the dependent variable and explanatory variables measure potential macroeconomic, external linkages, industry-specific, institutional and sociological determinants. The results reveal that convergence is weak and heterogeneous across sub-periods (pre-crisis and crisis), economic groups (core and periphery), product type (savings and credit) and products’ maturities (short, medium and long). Among the fundamental determinants, inflation, output correlation, and sociological factors strongly impact convergence, however, the explanatory power of determinants weakens during the crisis period.