ABSTRACT
This chapter examines the linkages between the premium on debt finance and monetary policy in the euro area and whether these mechanisms have changed since the introduction of the single currency. The average level of the bank-based external finance premia is between 30 and 90 basis points lower in Stage Three of European Economic and Monetary Union than in Stage Two in three segments of the bank credit market. The interest rate channel works through the price of debt finance and deals with the issue of how policy-controlled interest rates affect the interest rates charged by banks and other financial intermediaries. The market-based external finance premium has become of importance around the introduction of the euro and is approximated by the spread between long-term BBB-rated corporate bonds and government bonds with a comparable maturity. While competition seems to be relatively high for household mortgages, the uncollateralized consumer credit market seems to be less competitive.
