Is monetary policy transmission in Iceland comparable to other European countries? : an analysis of interest rate pass-though pre- and post-panademic

Abstract

This thesis examines the compatibility of monetary policy transmission to interest rates in Iceland with that of other European countries, focusing on the pre- and post-pandemic tightening cycles. The thesis applies the methodology and framework used in the IMF working paper “Monetary Policy Pass-Through to Interest Rates: Stylized Facts from 30 European Countries” using the same empirical techniques to the Icelandic data. Gathering bank interest rate data on deposit and lending rates, including non-indexed and indexed mortgages in Iceland, using methods such as local projection and interest rate betas to estimate the interest rate pass-through. Our findings show a fluctuating difference between the strength of pass-through to each period, but more generally, a stronger pass-through to earlier cycles. The results are comparable to the European trends to a certain degree but deviate from them as well, which may be caused by differences in factors such as financial market concentration, liquidity position and loan-to-deposit ratios. The structural characteristics of the Icelandic banking system make it particularly sensitive to such factors. The thesis highlights both the deviations and the shared patterns in monetary transmission between Iceland and other European countries, offering insight for possible enhancements to making monetary policy more effective in small open economies.