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The monetary transmission mechanism: evidence and implications for European Monetary Union

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  • Fountas, Stilianos
  • Papagapitos, Agapitos

Abstract

We provide some evidence consistent with a heterogeneous credit channel of monetary policy transmission in the European Union. Using the techniques of cointegration and Error Correction Models, we have shown that the external finance premium is one important leading indicator of real economic activity in some EU countries, namely, Denmark, Finland, Ireland, Italy and the Netherlands. No evidence is found for Belgium, France, Germany and the UK. These findings imply that a common monetary policy implemented by the European Central Bank might be transmitted in different ways across the member countries of the monetary union, thus exacerbating existing regional disparities among the member countries.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 70 (2001)
Issue (Month): 3 (March)
Pages: 397-404

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Handle: RePEc:eee:ecolet:v:70:y:2001:i:3:p:397-404

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Web page: http://www.elsevier.com/locate/ecolet

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References

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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
  3. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  4. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
  5. Eichenbaum, Martin, 1997. "Some Thoughts on Practical Stabilization Policy," American Economic Review, American Economic Association, vol. 87(2), pages 236-39, May.
  6. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
  7. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  8. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28.
  9. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  10. R. Glenn Hubbard, 1994. "Is There a `Credit Channel' for Monetary Policy?," NBER Working Papers 4977, National Bureau of Economic Research, Inc.
  11. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  12. Dale, Spencer & Haldane, Andrew G., 1995. "Interest rates and the channels of monetary transmission: Some sectoral estimates," European Economic Review, Elsevier, vol. 39(9), pages 1611-1626, December.
  13. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc.
  14. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
  15. Garretsen, Harry & Swank, Job, 1998. "The Transmission of Interest Rate Changes and the Role of Bank Balance Sheets: A VAR-Analysis for the Netherlands," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 325-339, April.
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Cited by:
  1. Cândida Ferreira, 2009. "The Credit Channel Transmission of Monetary Policy in the European Union," Working Papers Department of Economics 2009/08, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Ivo J. M. Arnold & Evert B. Vrugt, 2004. "Firm Size, Industry Mix and the Regional Transmission of Monetary Policy in Germany," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 35-59, 02.
  3. Cândida Ferreira, 2009. "European Integration and the Credit Channel Transmission of Monetary Policy," Working Papers Department of Economics 2009/07, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Riccardo Fiorentini & Roberto Tamborini, 2001. "The Monetary Transmission Mechanism in Italy: The Credit Channel and a Missing Ring," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 60(1), pages 1-42, June.
  5. Cobham, Alex, 2001. "EMU, Monetary Policy and the Role of Financial Constraints," EIFC - Technology and Finance Working Papers 6, United Nations University, Institute for New Technologies.

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