Has the Transmission of Policy Rates to Lending Rates Changed in the Wake of the Global Financial Crisis?

Central banks of major advanced economies have maintained a very accommodative monetary policy stance in the last few years. However, concerns have surfaced that the transmission of low policy rates to lending rates has been weaker than in the past. Has the transmission of policy rates to lending rates been impaired by the global financial crisis? To answer this question, we first estimate standard cointegrating equations linking policy and lending rates for non-financial firms in Italy, Spain, the United Kingdom and the United States. We then test for structural change in the cointegration parameters, finding strong evidence of a break after Lehman Brothers' default. Such a structural break is owed to a strong increase in the mark-up of the lending rate over the policy rate that standard models assume constant in the long run. The structural shift is explained by compounding the lending rate equation with measures of risk.