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The monetary transmission mechanism in the euro area: has it changed and why?

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  • Martina Cecioni

    ()
    (Bank of Italy)

  • Stefano Neri

    ()
    (Bank of Italy)

Abstract

Based on a structural VAR and a dynamic general equilibrium model, we provide evidence of the changes in the monetary transmission mechanism (MTM) in the European Monetary Union after the adoption of the common currency in 1999. The estimation of a Bayesian VAR over the periods before and after 1999 suggests that the effects of a monetary policy shock on output and prices have not significantly changed over time. We claim that this cannot be the final word on the evolution of the MTM as changes in the conduct of monetary policy and the structure of the economy may have offset each other giving rise to similar responses of output and inflation to monetary policy shocks between the two periods. The estimation of a DSGE model with several real and nominal frictions over the two sub-samples shows that monetary policy has become more effective in stabilizing the economy as the result of a decrease in the degree of nominal rigidities and a shift in monetary policy towards inflation stabilization.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 808.

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Date of creation: Apr 2011
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Handle: RePEc:bdi:wptemi:td_808_11

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Web page: http://www.bancaditalia.it
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Keywords: monetary policy; transmission mechanism; Bayesian methods;

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References

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  1. Domenico Giannone & Lucrezia Reichlin, 2005. "Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it?," Macroeconomics 0511016, EconWPA.
  2. Fabio Canova & Matteo Ciccarelli & Eva Ortega, 2009. "Do institutional changes affect business cycles? Evidence from Europe," Banco de Espa�a Working Papers 0921, Banco de Espa�a.
  3. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, vol. 48(2), pages 387-412, August.
  4. Dedola, Luca & Neri, Stefano, 2004. "What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions," CEPR Discussion Papers 4537, C.E.P.R. Discussion Papers.
  5. Benati, Luca, 2010. "Are policy counterfactuals based on structural VAR's reliable?," Working Paper Series 1188, European Central Bank.
  6. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2009. "Business Cycles in the Euro Area," CEPR Discussion Papers 7124, C.E.P.R. Discussion Papers.
  7. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  8. Kai Christoffel & Keith Kuester & Tobias Linzert, 2009. "The role of labor markets for Euro area monetary policy," Working Papers 09-1, Federal Reserve Bank of Philadelphia.
  9. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
  10. Jean Boivin & Marc P. Giannoni & Benoît Mojon, 2008. "How Has the Euro Changed the Monetary Transmission?," NBER Working Papers 14190, National Bureau of Economic Research, Inc.
  11. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  12. Ciccarelli, Matteo & Rebucci, Alessandro, 2006. "Has the transmission mechanism of European monetary policy changed in the run-up to EMU?," European Economic Review, Elsevier, vol. 50(3), pages 737-776, April.
  13. Benati, Luca & Surico, Paolo, 2008. "VAR analysis and the Great Moderation," Working Paper Series 0866, European Central Bank.
  14. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
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Citations

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Cited by:
  1. Popescu Iulian Vasile, 2013. "The analysis of monetary policy effects with emphasis on monetary policy strategy types. A VAR approach," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(47), pages 57-74, March.
  2. Zsolt Darvas, 2013. "Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions," Empirica, Springer, vol. 40(2), pages 363-390, May.
  3. Kemal Bagzibagli, 2012. "Monetary Transmission Mechanism and Time Variation in the Euro Area," Discussion Papers 12-12, Department of Economics, University of Birmingham.
  4. Konstantins Benkovskis & Andrejs Bessonovs & Martin Feldkircher & Julia Wörz, 2011. "The Transmission of Euro Area Monetary Shocks to the Czech Republic, Poland and Hungary: Evidence from a FAVAR Model," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.
  5. Catherine Prettner & Klaus Prettner, 2012. " After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?," Department of Economics Working Papers wuwp138, Vienna University of Economics, Department of Economics.
  6. repec:onb:oenbwp:y:2011:i:3:b:1 is not listed on IDEAS
  7. Popescu, Iulia Vasile, 2012. "Effects of monetary policy in Romania. A VAR approach," MPRA Paper 41686, University Library of Munich, Germany.
  8. Prettner, Catherine & Prettner, Klaus, 2014. "How interdependent are Eastern European economies and the Euro area?," Center for European, Governance and Economic Development Research Discussion Papers 187, University of Goettingen, Department of Economics.
  9. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2013. "Do euro area countries respond asymmetrically to the common monetary policy?," Temi di discussione (Economic working papers) 923, Bank of Italy, Economic Research and International Relations Area.
  10. Iulian Popescu, 2012. "Effects Of Monetary Policy In Romania - A Var Approach," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 605-624, September.
  11. Matteo Luciani & Antoniomaria Conti & Matteo Barigozzi, 2013. "Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?," ULB Institutional Repository 2013/153330, ULB -- Universite Libre de Bruxelles.
  12. Iulian Vasile POPESCU, 2014. "Global financial crisis-driven mutations affecting the transmission mechanism customized to monetary policy strategies. A VAR, SVAR and BVAR approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(591)), pages 35-66, February.

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