The Symmetry of ECB Monetary Policy Impact Under Scrutiny: An Assessment

Abstract

Since its inception, EMU adequacy to be an Optimal Currency Area was questioned, and, along with it, the homogeneous transmission of the monetary impulses across the Eurozone. Adopting a Bayesian Time-Varying parameter FAVAR model that fixes the flaws present in the existing literature and exploits a sufficiently extended dataset, we provide an updated assessment of the transmission mechanism’s functioning and of its symmetry along these first years of ECB operations. The empirical analysis shows that the occurrence of the two crises significantly altered the policy transmission, with the interest rate channel being the most affected. Policy-wise, our findings suggest that authorities must push towards a consistent innovation both on fiscal and monetary sides.

Keywords: Monetary Policy Transmission, Optimal Currency Areas, European Monetary Union, Time-Varying FAVAR

JEL Classification: E42, E52, E58, F42, F45