Monetary Policy Transmission: The Role Of Banking Sector Characteristics In The Euro Area

Abstract

This study examines the impact of monetary policy shocks on the macroeconomic performance of 20 euro area countries. In doing so, it assesses how variations in the characteristics of the banking system affect the transmission of monetary policy. The main results show that a contractionary monetary policy shock reduces both inflation and retail sales while increasing the unemployment rate. In contrast, an expansionary monetary policy shock has positive but much milder effects on the economy. Βanking systems with higher profitability, risk exposure and lower assets-to-GDP cause a stronger effect of monetary policy on the economy. The main results hold when we consider alternative monetary policy shocks.

Keywords: Monetary Policy, Euro Area, Banking Characteristics, Monetary Policy Transmission

JEL Classification: E58, E44, F45, G21, G15