Monetary Policy Effects: New Evidence from the Italian Flow of Funds

Abstract

This paper provides new evidence on the transmission of monetary policy in Italy by analyzing the effects of a restrictive monetary policy shock on the flows-of-funds variables. Firms reduce their issuance of debt and their acquisitions of financial assets, so that there is no evidence of strong financial frictions. Households increase short-term liabilities and reduce holdings of liquid assets and shares immediately after the shock. The public sector's deficit increases during the first two years. The results shed new light on the role played by the financial decisions of the various economic sectors in the transmission of monetary policy in Italy.