TY - JOUR AU - Boivin,Jean AU - Giannoni,Marc P. AU - Mojon,Benoît TI - How Has the Euro Changed the Monetary Transmission? JF - National Bureau of Economic Research Working Paper Series VL - No. 14190 PY - 2008 Y2 - July 2008 UR - http://www.nber.org/papers/w14190 L1 - http://www.nber.org/papers/w14190.pdf N1 - Author contact info: Jean Boivin Bank of Canada 234 Wellington Street Ottawa Ontario K1A 0G9 Canada Tel: 613-782-8278 E-Mail: jboivin@bankofcanada.ca Marc Giannoni Federal Reserve Bank of New York Macroeconomic & Monetary Studies Function Research and Statistics Group 33 Liberty Street New York, NY 10045-0001 Tel: 212-720-6518 Fax: 212-720-1844 E-Mail: mg2190@columbia.edu Benoît Mojon Banque de France 1 rue de la Vrilliere 75001 Paris E-Mail: benoit.mojon@banque-france.fr M1 - published as Jean Boivin, Marc P. Giannoni, Benoît Mojon. "How Has the Euro Changed the Monetary Transmission Mechanism?," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2008, Volume 23" University of Chicago Press (2009) M3 - presented at "23rd Annual Conference on Macroeconomics", April 4-5, 2008 AB - This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically. ER -