Determinants of loan interest rates in a country with a currency board: Evidence from Bulgaria

- The interest rate pass-through in Bulgaria is examined with EURIBOR as a reference rate.
- Both standard and asymmetric VECM are estimated.
- The business climate conditions affect the interest rates on loans.
- The pass-through of loan interest rates in Bulgaria has decreased during the crisis.
- The results point to differences across the individual segments of the credit market.

This article examines the process of loan interest rate formation in Bulgaria. While the standard approach in the literature on interest rate pass-through is focused on the impact of changes in the domestic money market rate, the objective of this study is to adapt the existing interest rate pass-through analysis to the case of a country with a currency board arrangement. To this end, the role of money market conditions in the euro area and the influence of the domestic business climate are taken into account. The impact of these factors on loan interest rates in Bulgaria is examined through symmetric as well as asymmetric error-correction models. The analysis identifies specific patterns in the response of loan interest rates depending on the sector of the borrower, the currency denomination and the maturity of loans.