Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All?

Ignazio Angeloni, Anil K. Kashyap, Benoit Mojon, Daniele Terlizzese

NBER Working Paper No. 9984
Issued in September 2003
NBER Program(s):   EFG   ME

Drawing on recent Eurosystem research that uses a range of econometric techniques and a number of new data sets, we propose a comprehensive description of how monetary policy affects the euro area economy. We focus mainly on three questions: (1) what are the stylized facts concerning the transmission of monetary policy for the area as a whole and for individual countries? (2) can the classic' interest rate channel (IRC) alone, without capital market imperfections, explain these facts? (3) if not, is the bank lending channel a likely candidate to complete the story? We find plausible euro-area wide monetary policy responses for prices and output that are similar to those generally reported for the U.S. However, investment (relative to consumption) seems to play a larger role in euro area monetary policy transmission than in the U.S. We cannot reject the hypothesis that the IRC completely characterizes transmission in a few countries, and estimate it to be substantial in almost all. Where the IRC is not dominant, there is normally some direct evidence supporting the presence of a bank lending channel (or other financial transmission channel). The cases where financial effects appear important can be further split according to whether they primarily relate to consumption or investment.

(445 K)

Published:

• Angeloni, Ignazio, Anil K. Kashyap, Benoit Mojon and Daniele Terlizzese. "The Output Composition Puzzle: A Difference In The Monetary Transmission Mechanism In The Euro Area And The United States," Journal of Money, Credit and Banking, 2003, v35(6,Dec), 1265-1306. ,
• Imperfect Knowledge, Inflation Expectations, and Monetary Policy, Athanasios Orphanides, John Williams, in The Inflation-Targeting Debate (2005), University of Chicago Press
  

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