Inside the black box of the Euro area monetary policy transmission: Explaining the heterogeneity
Christophe Blot  1, 2@  , Paul Hubert  3  
1 : OFCE-Sciences Po
Sciences Po
69, quai d'Orsay 75007 paris -  France
2 : EconomiX
Université Paris Nanterre : UMR7235, Centre National de la Recherche Scientifique : UMR7235
3 : OFCE – Sciences Po
Sciences Po

Since 1999, Euro area monetary policy decisions are taken by the ECB for all euro area countries together. Yet, it is still widely acknowledged that EMU is an incomplete monetary union, which may influence the transmission of monetary policy across countries. The aim of this paper is to investigate whether the transmission of monetary policy in the euro area experiences significant asymmetries and to document the potential sources of heterogeneities. To that end, we first identify monetary policy shocks by estimating the reaction function of the ECB in the spirit of Romer and Romer (2004). Then, we resort to Jordà (2005)'s local projections to assess the dynamic impact of monetary policy on GDP, inflation and several variables capturing the key mechanism of different transmission channels. Our results suggest the effects of ECB policy decisions are extremely heterogeneous with GDP impacts that vary by a factor of three and inflation impacts by a factor of five. Our analysis also suggests that these differences arise from different transmission mechanisms more than monetary shocks being different to each country.


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