The original sin: fragmentation in the money market and its transmission to the credit market
The paper develops a country-specific money market fragmentation indicator in Europe and analyzes its effect on credit market transmission.
What it examines
The paper develops a country-specific measure of fragmentation in the euro area’s unsecured overnight money market using transaction-level data. It examines how country-related pricing differences impact credit markets by employing fixed effects regressions while controlling for bank risk factors, aiming to clarify monetary policy transmission efficiency.
What it concludes
Findings confirm that euro area money market fragmentation exists, with Italian and Spanish banks incurring higher costs than German banks. This premium is fully passed to new loan rates. The study informs monetary policy adjustments, credit market monitoring, and suggests further research on credit risk and liquidity management differences.
Evidence objects
Research reveals euro area market fragmentation: Italian banks pay an $8$ basis point premium, Spanish banks $2$, while Dutch banks enjoy a $6$ basis point discount compared to German banks.
key_findings bullet 1 · key_findings · validation V0
Utilizing detailed transaction-level data from 2017--2024, the study pioneers a country-specific fragmentation indicator and innovatively applies fixed effects regressions and bootstrapping techniques, linking premium transmission directly to new loan rates.
key_findings bullet 2 · key_findings · validation V0
Although rigorous analysis with high-frequency data bolsters findings, limitations persist with small bank samples and difficulty isolating country influences from individual characteristics, impacting monetary policy transmission and credit market dynamics.
key_findings bullet 3 · key_findings · validation V0
By examining money market fragmentation and its impact on credit markets through a country-specific lens, the paper introduces an innovative, transaction-level methodology challenging established theories like the $$\text{'law of one price'}$$. Its original perspective reinvigorates understanding of monetary policy transmission, offering readers fresh insights into credit and debt market dynamics.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … broader banking activities, and particularly the credit markets. In the second part of … Our focus is on the credit market, as this segment plays a central role in the monetary …
Source row: 1982 · abstract type: snippet