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The output composition puzzle - a difference in the monetary transmission mechanism in the euro area and the US

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Abstract

We revisit recent evidence on how monetary policy affects output and prices in the U.S. and in the euro area. The response patterns to a shift in monetary policy are similar in most respects, but differ noticeably as to the composition of output changes. In the euro area investment is the predominant driver of output changes, while in the U.S. consumption shifts are significantly more important. We dub this difference the output composition puzzle and explore its implications and several potential explanations for it. While the evidence seems to point at differences in consumption responses, rather than investment, as the proximate cause for this fact, the source of the consumption difference remains a puzzle. JEL Classification: E21; E22; E30; E52.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 268.

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Length: 60 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:ecb:ecbwps:20030268

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Keywords: monetary policy transmission; business cycles; consumption; investment.;

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  1. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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