Fragmentation and Monetary Policy in the Euro Area

32 Pages Posted: 28 Oct 2013

See all articles by Ali Al-Eyd

Ali Al-Eyd

International Monetary Fund (IMF)

Pelin Berkmen

International Monetary Fund (IMF)

Date Written: October 2013

Abstract

The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.

Keywords: Monetary policy, Euro Area, Capital markets, Sovereign debt, Bond issues, Banks, Interest rates, Credit risk, Monetary transmission mechanism, European Central Bank

JEL Classification: E43, E44, E52

Suggested Citation

Al-Eyd, Ali and Berkmen, S. Pelin, Fragmentation and Monetary Policy in the Euro Area (October 2013). IMF Working Paper No. 13/208, Available at SSRN: https://ssrn.com/abstract=2346258

Ali Al-Eyd (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

S. Pelin Berkmen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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