Asymmetric monetary policy effects in EMU

Abstract

This paper develops a semi-structural modelling approach to study asymmetric monetary transmission in Europe. A system of dynamic equations containing reaction functions for monetary policy as well as output gap and inflation equations is simultaneously estimated for France, Germany and Italy. We find asymmetries on the demand side in the strength of interest rate transmission and on the supply side in the effects of the output gap on inflation. The responses are similar in Germany and Italy and generally stronger than in France. Out-of-sample tests do not find a structural break in the transmission mechanisms prior to the establishment of the European Monetary Union.

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

“…The output gap coefficient in equation (5) (2002) and Clausen and Hayo (2002) suggests that prices react more strongly to capacity utilisation in Germany than in many other euro area countries. Hence, this channel does not provide an explanation for the ECB's relatively stronger response to the output gap.…”

“…The available empirical evidence indicates that German output reacts rather more strongly to monetary policy changes than the euro area average (Clausen and Hayo 2002, Peersman 2004, Hofmann, 2004. Thus, from the perspective of the Svensson model, the significant differences in output gap coefficients between the ECB and the Bundesbank monetary policy reaction functions can only be explained by a relatively higher interest rate elasticity of the German economy.…”

The Symmetry of ECB Monetary Policy Impact Under Scrutiny: An Assessment

“…A hypothesis is that in 1999 the effective start of the monetary union area was bound to generate a structural break, altering the interrelations between the member economies and hence affecting the propagation of the monetary actions. The evidences that can be found in literature are mixed (see Boivin et al, 2008, Clausen andHayo, 2006), leaving doubts on the true impact of such an important political step.…”

On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?

“…This strand includes the works of Gilchrist (1993, 1994), Oliner and Rudebusch (1996), Britton and Whitley (1997), Defina (1998, 1999), Dornbusch et al (1998), Ramos et al (2003), and Clausen and Hayo (2006). All these studies have found differential responses, whether the study concentrated on is for the European Union or the United States.…”