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Has the monetary transmission process in the euro area changed? Evidence vased on VAR estimates

Author

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  • Axel A Weber
  • Rafael Gerke
  • Andreas Worms

Abstract

Empirical evidence on whether the euro area monetary transmission process has changed is, at best, mixed. We argue that this inconclusiveness is likely to be due to the fact that existing empirical studies concentrate on the effects of a particular development on a specific transmission channel. Another problem of this literature is that specific changes could have off-setting effects regarding the overall effectiveness of monetary policy, leaving open the question whether the ability of monetary policy to control inflation has been altered. In order to shed light on this issue, we investigate whether there has been a significant change in the overall transmission of monetary policy to inflation and output by estimating a standard VAR for the euro area and by searching for a possible break date. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare impulse responses to a monetary policy shock for these episodes and find that the well-known "stylised facts" of monetary policy transmission remain valid. Therefore, we argue that the general guiding principles of the Eurosystem monetary policy remain adequate. Moreover, it seems that monetary transmission after 1998 is not very different from before 1996, but probably very different in the interim period. This implies that evidence for the euro area could be biased by an "atypical" interim period 1996-1999. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Marvin Goodfriend and Armínio Fraga Neto.

Suggested Citation

  • Axel A Weber & Rafael Gerke & Andreas Worms, 2009. "Has the monetary transmission process in the euro area changed? Evidence vased on VAR estimates," BIS Working Papers 276, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:276
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    2. Stefanos Papadamou & Vaggelis Arvanitis & Costas Siriopoulos, 2014. "A Bank Lending Channel that is Working via Housing or via Consumer Loans? Evidence from Europe," Bulletin of Applied Economics, Risk Market Journals, vol. 1(1), pages 15-34.
    3. Catherine Prettner & Klaus Prettner, 2012. "After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?," EcoMod2012 4421, EcoMod.
    4. Masagus M. Ridhwan & Henri L. F. Groot & Piet Rietveld & Peter Nijkamp, 2014. "The Regional Impact of Monetary Policy in Indonesia," Growth and Change, Wiley Blackwell, vol. 45(2), pages 240-262, June.
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    6. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2014. "Labor Selection, Turnover Costs, and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 115-144, February.
    7. Iñaki Aldasoro & Robert Unger, 2017. "External financing and economic activity in the euro area - why are bank loans special?," BIS Working Papers 622, Bank for International Settlements.
    8. Dedu, Vasile & Stoica, Tiberiu, 2014. "The Impact of Monetaru Policy on the Romanian Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 71-86, June.
    9. António Afonso & António Jorge Silva, 2014. "The Monetary Transmission Mechanism in the Euro Area: has it changed with the EMU? A VAR approach, with fiscal policy and financial stress considerations," Working Papers Department of Economics 2014/10, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    10. International Monetary Fund, 2010. "The Transmission Mechanism in Armenia: New Evidence from a Regime Switching VAR Analysis," IMF Working Papers 2010/270, International Monetary Fund.
    11. Kolasa, Marcin & Rubaszek, Michał & Walerych, Małgorzata, 2021. "Do flexible working hours amplify or stabilize unemployment fluctuations?," European Economic Review, Elsevier, vol. 131(C).
    12. Legrand, Romain, 2014. "Euro introduction: Has there been a structural change? Study on 10 European Union countries," Economic Modelling, Elsevier, vol. 40(C), pages 136-151.
    13. Ouerk, Salima & Boucher, Christophe & Lubochinsky, Catherine, 2020. "Unconventional monetary policy in the Euro Area: Shadow rate and light effets," Journal of Macroeconomics, Elsevier, vol. 65(C).

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    Keywords

    Monetary policy transmission; Eurosystem; euro area; globalisation; financial development; VAR;
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