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One Size Does Not Fit All: Unveiling Asymmetric Transmission of Monetary Policy in the Euro Area

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Listed:
  • Sangyup Choi

    (Yonsei University)

  • Kimoon Jeong

    (University of Virginia)

  • Jiseob Kim

    (Yonsei University)

Abstract

Despite extensive research, there is little consensus on whether common monetary policy generates systematically asymmetric effects within the euro area. We argue that this ambiguity arises from failing to account for heterogeneity in local cyclical conditions at the time of policy changes, which leads state-dependent responses to obscure underlying cross-country differences. To address this, we construct a measure of country-specific monetary policy that internalizes local cyclical conditions. This adjustment reveals systematic asymmetries in policy transmission between core and periphery euro area countries that conventional methods overlook. We find that macroeconomic and financial variables respond more strongly in periphery countries. In contrast, credit and housing booms are largely absent in core countries. This differential response is consistent with the bank lending channel of monetary policy: banks in periphery countries ease mortgage lending standards following an expansionary shock, while those in core countries tighten them. Cross-border banking flow patterns further corroborate the importance of credit supply in explaining regional heterogeneity.

Suggested Citation

  • Sangyup Choi & Kimoon Jeong & Jiseob Kim, 2025. "One Size Does Not Fit All: Unveiling Asymmetric Transmission of Monetary Policy in the Euro Area," Working papers 2025rwp-256, Yonsei University, Yonsei Economics Research Institute.
  • Handle: RePEc:yon:wpaper:2025rwp-256
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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