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Fragmentation and Monetary Policy in the Euro Area

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  • A. J. Al-Eyd
  • Pelin Berkmen
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    Abstract

    The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/208.

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    Length: 31
    Date of creation: 04 Oct 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/208

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    Related research

    Keywords: Monetary policy; Euro Area; Capital markets; Sovereign debt; Bond issues; Banks; Interest rates; Credit risk; Monetary transmission mechanism; European Central Bank; Monetary policy; Euro Area; Capital markets; Sovereign debt; Bond issues; Banks; Interest rates; Credit risk; Monetary transmission mechanism; European Central Bank;

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    1. Philippine Cour-Thimann & Bernhard Winkler, 2012. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 765-803, WINTER.
    2. 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.
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