Regional asymmetries in monetary policy transmission: The case of the Greek regions

Abstract

Monetary policy is unlikely to have a uniform impact on the real economic activity across regions with different industrial structures. This study measures the heterogeneous effects of monetary policy on regional and sectoral output of the 13 regions in Greece over the period 1980 to 2009. By using an unrestricted vector autoregressive model and the impulse response analysis, our results show that an interest rate shock affects the economic activity across regions differently. Furthermore in our investigation, we use a panel vector autoregressive model so as to investigate the dynamic variation of the impact of interest rates controlling also for time and cross regions fixed effects associated with specific time invariant regions' characteristics as well as with time variant characteristics attributed to the integration process of these regions. Finally, in identifying the channel of monetary policy transmission in the Greek regions, we investigate the role of Greek regional industrial structures in explaining these variations.

The Regional Effects of Monetary Policy: A Survey of the Empirical Literature

“…() report that, for the same period, the interest rate channel was the dominant factor at a cross‐country level. Regarding the sub‐national dimension, Anagnostou and Papadamou (), Arnold and Vrugt (2002, 2004) and De Lucio and Izquierdo () confirm the interplay between the industrial composition and the regional responsiveness to monetary policy for Greece, the Netherlands, Germany and Spain, respectively.…”

“…() to assess the effects of monetary policy on two groups of countries: (1) countries under sovereign stress (Greece, Ireland, Italy, Portugal and Spain); and (2) the remaining countries (Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands). Lastly, the sub‐national approach has been adopted by Anagnostou and Papadamou () for the regions belonging to the countries of the south of the Eurozone (that is, Italy, Greece, Spain and Portugal), while Arnold and Vrugt (, ), Anagnostou and Papadamou (), De Lucio and Izquierdo (), Rodríguez‐Fuentes et al . () and Rodríguez‐Fuentes () have implemented this approach for the assessment of the effects of monetary policy for the regions within a single country (Germany, the Netherlands, Greece and Spain, respectively).…”

“…Other small open monetary unions for which the empirical evidence reports heterogeneity in the regional effects resulting from monetary policy include the United Kingdom (Mandalinci, ), Sweden (Svensson, ), Greece (Anagnostou and Papadamou, ), the Netherlands (Arnold and Vrugt, ), Germany (Arnold and Vrugt, ) and Spain (De Lucio and Izquierdo, ; Rodríguez‐Fuentes et al ., ; Rodríguez‐Fuentes, ).…”

Regional Economic Structure and Heterogeneous Effects of Monetary Policy: Evidence From Indonesian Provinces

“…For example, Vrugt (2002, 2004) point out the importance of industrial composition to explain regional transmission of monetary policy in the Netherlands and Germany. For the case of Greek, Anagnostou and Papadamou (2016) find that regions' sensitivity to interest rate shocks is related to regions' characteristics such as the share of particular industries in GDP. Finally, Ridhwan et al (2014) also mention that industrial composition explains the variation in regional impacts of monetary policy changes, corroborating the pertinence of the interest rate channel and credit channel in monetary transmission in Indonesia.…”

Effect of Monetary Policy on Investment in Russian Regions

“…4 shocks (in terms of output losses) tends to be much greater in developing countries than in developed ones. Anagnostou and Papadamou (2015) apply the approach of Carlino and DeFina (1998) to explain the heterogeneous effects of monetary policy on the regions of Greece. The authors build a VAR model for each region using the following indicators: total employment, real GDP, short-term interest rate, and regional variables (GRP, household expenditure, investment, and employment).…”