Changes in euro area monetary transmission?

Abstract

Empirical evidence on whether euro area monetary transmission 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 particular developments on specific transmission channels. Such analyses typically require strong assumptions. Moreover, specific changes could have off-setting effects regarding the overall effectiveness of monetary policy. 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 endogenously searching for possible break dates. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare the effects of monetary policy shocks for these episodes and find that the wellknown "stylized 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 compared to the interim period. This implies that existing evidence for the euro area could be biased by this "atypical" interim period 1996-1999. JEL classification: E44, E52, E58, G21

Common macroeconomic shocks and business cycle fluctuations in Euro area countries

“…However the sample period considered, i.e. 1980-2005, poses serious doubts on the possibility to recover a common monetary policy shock, given the existence of national central banks for the greater part of the historical period 1980-2005. Weber, Gerke, and Worms (2011, by using structural VAR techniques, investigate on possible changes in the transmission mechanism of monetary policy in the Euro area concerning output and inflation.…”

Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?

“…12 An alternative strategy to identify monetary policy is to adopt a recursive identification scheme, that is, the Cholesky decomposition as in Boivin et al (2009) andGambetti (2010a). Although recently criticized (Canova and Pina, 2005;Carlstrom, Fuerst and Paustian, 2009;Uhlig, 2009;Castelnuovo, 2011Castelnuovo, , 2012a, this is the simplest, and perhaps, still, the most diffused identification scheme in SVAR literature (Christiano, Eichenbaum and Evans, 1999;Peersman and Smets, 2003;Weber et al, 2011). The main problem of this identification scheme is that it relies on zero short-run restrictions, which are too binding and not necessarily based on economic theory.…”

“… Since Weber, Gerke and Worms () find that the transmission mechanism of monetary policy was similar before 1996 and after 1999 but different during the transition period 1996–1998, as a robustness check we perform our analysis on the subsample 1983–1996 rather than 1983–1998. Results are identical to the one obtained with our benchmark specification, and are available in the Supplementary Appendix to this article. …”

Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?

“…6 Since Weber et al (2011) find that the transmission mechanism of monetary policy was similar before 1996 and after 1999 but different during the transition period 1996-1998, as a robustness check we perform our analysis on the subsample 1983-1996 rather than 1983-1998. Results are identical to the one obtained with our benchmark specification, and are available in a complementary appendix to this paper.…”