How Has the Euro Changed the Monetary Transmission?
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.
We thank Daron Acemoglu, Olivier Blanchard, Andrea Ferrero, Jordi Galí, Bruce Preston, Veronica Rappoport, Kenneth Rogoff, Chris Sims, Frank Smets, Michael Woodford, and our discussants Lucrezia Reichlin and Harald Uhlig for valuable discussions and comments. We also benefited from the comments of participants at the 2008 NBER Macroeconomics Annual Conference, the NY Area Workshop on Monetary Policy, and seminar participants at the Bundesbank, CREI, Federal Reserve Bank of Chicago, European Central Bank, HEC Montréal, Universität Münster. Boivin and Giannoni are grateful to the National Science Foundation for financial support (SES-0518770). The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
How Has the Euro Changed the Monetary Transmission Mechanism?, Jean Boivin, Marc P. Giannoni, Benoît Mojon. in NBER Macroeconomics Annual 2008, Volume 23, Acemoglu, Rogoff, and Woodford. 2009