This paper examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), it analyses the pass-through of changes in money market rates to retail bank interest rates in Italy in the period 1985-2002. The main results of the paper are: 1) the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 Consolidated Law on Banking; 2) interest rate adjustment in response to positive and negative shocks is asymmetric in the short run, but not in the long run; 3) banks adjust their loan (deposit) rate faster during periods of monetary tightening (easing); 4) this asymmetry almost vanished since the 1990s.
Published in 2007 in: Applied Economics, v. 39, 19, 2503-2517