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

  • Fountas, Stilianos
  • Papagapitos, Agapitos

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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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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  1. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  2. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  5. 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.
  6. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  7. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  8. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
  9. R. Glenn Hubbard, 1994. "Is There a `Credit Channel' for Monetary Policy?," NBER Working Papers 4977, National Bureau of Economic Research, Inc.
  10. 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.
  11. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
  12. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
  13. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
  14. Eichenbaum, Martin, 1997. "Some Thoughts on Practical Stabilization Policy," American Economic Review, American Economic Association, vol. 87(2), pages 236-39, May.
  15. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
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