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Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All?

41 Pages Posted: 21 Sep 2003  

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Benoit Mojon

European Central Bank (ECB)

Daniele Terlizzese

Bank of Italy

Date Written: September 2003

Abstract

Drawing on recent Eurosystem research that uses a range of econometric techniques and a number of new data sets, we propose a comprehensive description of how monetary policy affects the euro area economy. We focus mainly on three questions: (1) what are the stylized facts concerning the transmission of monetary policy for the area as a whole and for individual countries? (2) can the classic' interest rate channel (IRC) alone, without capital market imperfections, explain these facts? (3) if not, is the bank lending channel a likely candidate to complete the story? We find plausible euro-area wide monetary policy responses for prices and output that are similar to those generally reported for the U.S. However, investment (relative to consumption) seems to play a larger role in euro area monetary policy transmission than in the U.S. We cannot reject the hypothesis that the IRC completely characterizes transmission in a few countries, and estimate it to be substantial in almost all. Where the IRC is not dominant, there is normally some direct evidence supporting the presence of a bank lending channel (or other financial transmission channel). The cases where financial effects appear important can be further split according to whether they primarily relate to consumption or investment.

Suggested Citation

Angeloni, Ignazio and Kashyap, Anil K. and Mojon, Benoit and Terlizzese, Daniele, Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All? (September 2003). NBER Working Paper No. w9984. Available at SSRN: https://ssrn.com/abstract=447271

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Anil K. Kashyap (Contact Author)

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Benoit Mojon

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 13 44 7849 (Phone)
+49 69 13 44 6000 (Fax)

Daniele Terlizzese

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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