Has the Monetary Transmission Process in the Euro Area Changed? Evidence Based on VAR Estimates

63 Pages Posted: 30 Jul 2009

See all articles by Axel A. Weber

Axel A. Weber

University of Cologne - Department of Economics; Centre for Economic Policy Research (CEPR)

Rafael Gerke

affiliation not provided to SSRN

Andreas Worms

Deutsche Bundesbank, Economics Department

Date Written: March 1, 2009

Abstract

Empirical evidence on whether the euro area monetary transmission process has changed is, at best, mixed. We argue that this inconclusiveness is likely to be due to the fact that existing empirical studies concentrate on the effects of a particular development on a specific transmission channel. Another problem of this literature is that specific changes could have off-setting effects regarding the overall effectiveness of monetary policy, leaving open the question whether the ability of monetary policy to control inflation has been altered. In order to shed light on this issue, we investigate whether there has been a significant change in the overall transmission of monetary policy to inflation and output by estimating a standard VAR for the euro area and by searching for a possible break date. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare impulse responses to a monetary policy shock for these episodes and find that the well-known 'stylised facts' of monetary policy transmission remain valid. Therefore, we argue that the general guiding principles of the Eurosystem monetary policy remain adequate. Moreover, it seems that monetary transmission after 1998 is not very different from before 1996, but probably very different in the interim period. This implies that evidence for the euro area could be biased by an 'atypical' interim period 1996-1999. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on 'Whither monetary policy? Monetary policy challenges in the decade ahead' in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on 'Beyond price stability - the challenges ahead' and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Marvin Goodfriend and Armínio Fraga Neto.

Keywords: monetary policy transmission, Eurosystem, euro area, globalisation, financial development, VAR

JEL Classification: E44, E52, E58, G21

Suggested Citation

Weber, Axel A. and Gerke, Rafael and Worms, Andreas, Has the Monetary Transmission Process in the Euro Area Changed? Evidence Based on VAR Estimates (March 1, 2009). BIS Working Paper No. 276, Available at SSRN: https://ssrn.com/abstract=1440241 or http://dx.doi.org/10.2139/ssrn.1440241

Axel A. Weber (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rafael Gerke

affiliation not provided to SSRN ( email )

Andreas Worms

Deutsche Bundesbank, Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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