What drives the adjustments of loan interest rates in Bulgaria? Results from a vector autoregression model

Using vector autoregressionmodel, this study examines the adjustments of loan interest rates in Bulgaria to shocks in depositinterest rates, business climate and operating costs in the banking system, taking into account theimpact of money market interest rate in the euro area. The analysis attempts to identify potentialdifferences in the reaction of interest rates on loans extended to different sectors of borrowers, loanswith different currency denomination and credit maturity. Impulse responses of loan interest rates toshocks in the other endogenous variables imply that: (1) in the short-run, a shock in the businessclimate indicator affects only interest rates on corporate loans; (2) in the short-run, operating costs in thebanking system do not have statistically significant impact on loan interest rates; (3) a shock in theweighted average interest rate on time deposits induces statistically significant adjustment of interestrate on household loans.